OPEC Cuts vs An Incredibly Tight Market: Both Cannot Be True
Last week, Saudi Arabia announced a 1 mmb/d oil output cut bringing total announced OPEC+ cuts to 3.7 mmb/d since last October.
In fact, OPEC+ began permanently managing oil markets at the beginning of 2017. Since then, cumulative cuts averaged 4.24 mmb/d since the start of 2022, or about 4% of global output (Figure 1).
That really puts the standard analyst supply-demand balance metric into question. Demand is weak enough that Saudi Arabia needs to cut 1 mmb/d but OPEC research projects demand growth of 2.5 mmb/d in the second half of 2023 to a record 103 mmb/d. All this with more than 4 mmb/d already being withheld from supply.
Yet analyst Eric Nutall stated recently that,
“The market’s recessionary fear is not allowing oil price today to reflect how tight things really are…Most stats that we look at…Chinese record demand, Indian record demand, JODI reporting record demand…point very, very strongly…[that] in the next few weeks, we should be seeing the largest stock draws in history.”
What about the 4.2 mmb/d that OPEC is currently holding back from the market? I suppose that is either noise or fiction.
The future that Nuttall describes is speculative. It’s also based on supply-demand balance that I have questioned for a long time.
What’s not speculation is that the entire OPEC+ oil market management project is an exercise in futility. Once started, of course, there’s no going back.
Yet somehow the disconnect between 5 years of analyst warnings about tight supply and more than 4 mmb/d of withheld volumes must be addressed. They can’t both be true.
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