Analysts Expect OPEC to Stand Pat, But No One is Ruling Out Surprises
3 min read
02 Jun 2023, 10:05 PM IST
Mixed and cryptic comments ahead of the gathering have backed the cartel into a corner
PremiumMembers of the Organization of the Petroleum Exporting Countries meeting this weekend will likely decide that the best option to arrest a slide in oil prices is to do nothing at all, but even doing that could add to oil price weakness in the short term.
That problem typifies the dilemma the cartel and its allies, known as OPEC+, face as they meet Sunday. With oil prices tumbling due to fears of global economic weakness, slashing output sharply could send the signal that OPEC is nervous about oil demand. On the other hand, doing nothing could leave investors to dictate the direction of oil prices.
Rather than setting a clear narrative, mixed and cryptic comments from leading OPEC+ members ahead of the gathering have backed the cartel into a corner, leaving them only bad options on whether to adjust oil supplies while also spurring rumors of tensions between the group, analysts say.
Comments from Saudi energy minister Abdulaziz bin Salman late last month, warning short sellers—investors betting against oil prices—“to watch out" were taken by some as confirmation that the group would cut production. Subsequent comments from Russian officials appeared to suggest the opposite—President Vladimir Putin said energy prices were near economically justified levels—with the mismatch only heightening volatility and making the meeting’s conclusion harder to call.
Brent crude oil, the international oil benchmark, has shed nearly 19% since OPEC+’s last gathering in October, dropping as low as $72 a barrel in recent days. The drop is surprising considering the October meeting saw the group slash output by 2 million barrels a day and a subsequent gathering saw a handful of the group’s largest members, including Saudi Arabia and Russia, add a further 1.6 million barrels-a-day worth of cuts to that figure.
The falling price should provide a strong incentive for the group’s members to act to shore up revenues by slashing output. Many of them—including de-facto leader Saudi Arabia—need higher prices to help balance their budgets and fund large spending projects.
But doing so could backfire, says Rebecca Babin, a senior energy trader at CIBC Private Wealth U.S. Investors have spent most of 2023 betting that a rally in oil prices, driven by rebounding Chinese demand, is just around the corner but have been burned as prices have tumbled and demand has appeared weaker than expected. Cutting sharply could send the signal that OPEC+ has a gloomy outlook for demand.
“The bullish thesis for crude is on life support making the mistake in messaging very costly," Babin says.
Instead, analysts broadly expect the group will roll over its October production quotas and use the meeting to mend any signs of a rift between Saudi Arabia and Russia. The most recent cuts only came into force in May, meaning the cartel likely wants more time for them to take effect on the oil market before acting again.
“We believe chances are slim for another surprise cut from OPEC+," says Helge Andre Martinsen, senior oil analyst at DNB Markets. Instead, “The focus of the meeting will likely be an attempt to demonstrate solidarity between member countries."
Even so, that course of action could weaken oil prices in the short term. Many investors took the Saudi energy minister’s comments as confirmation that cuts were coming and exited their short positions in anticipation. That means prices could resume their slide if the group fails to deliver them says Thu Lan Nguyen, head of commodity research at Commerzbank.
Still, while most analysts foresee the group standing pat, recent shock cuts and the conflicting messages from OPEC members mean none are willing to rule out another surprise move. Goldman Sachs analysts give such an outcome a 35% probability.
“Given the recent rant against speculators from the Saudi energy minister, nothing can be ruled out," says Ole Hansen, head of commodity strategy at Saxo.
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