Opec has more 'market power' as oil supply concerns return, Goldman Sachs says

The Opec+ will mostly likely unwind its production cuts for the second half of 2023, the investment bank said

US shale producers, under pressure from investors, have not been able to ramp up output quickly in response to high oil prices. Reuters

Opec has increased its control of oil markets as supply concerns return to the fore and amid declining output growth in other crude supplying countries, according to global investment banking and securities firm Goldman Sachs.

A “broader environment” of lower supply has returned market power back to the oil producer’s group, the New York-based company said in a report.

Oil prices have been volatile since the start of Russia’s military offensive in Ukraine last February. After surging to a 14-year high of nearly $140 a barrel last March, Brent, the benchmark for two thirds of the world’s oil, is currently trading in the $80 to $85 range.

The Opec+ alliance of 23 oil producing countries slashed its collective output by 2 million barrels a day in October, citing concerns of a global economic slowdown.

The supergroup of producers will most likely unwind its output cuts for the second half of 2023 at its June meeting, Goldman Sachs said.

“We believe the sequential demand increase we expect this year in the face of sluggish supply will require a reasonable supply response from the producer group to plug the widening deficit.

“However, Opec+ decisions are unanimous, and such a production increase will require the support of a group where few members possess the spare capacity to see their revenue increase.”

Goldman Sachs, which expects Brent to rise to $105 a barrel by the fourth quarter, said only a combination of “bearish shocks” would affect its forecast such as flat China demand in the first quarter and no Russian supply disruption.

Futures gained on Wednesday on an improving China demand outlook but were weaker on Thursday morning on US recession fears as St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester said interest rates need to rise beyond 5 per cent to control inflation and Microsoft said it is cutting 10,000 jobs and recording a $1.2 billion charge.

Brent was 1.15 per cent lower at $84 a barrel at 12.55pm UAE time on Thursday, while West Texas intermediate, the gauge that tracks US crude, was down 1.46 per cent at $78.32 a barrel.

Despite bearish forecasts from the International Monetary Fund and the World Bank on the global economy and the US potentially sliding into a recession, Goldman Sachs has said the US, the world's biggest economy, may avoid a recession. It also expects the global economy to have a soft landing.

Meanwhile, the latest data shows growth in China slowed to 3 per cent in 2022 as December’s Covid-19 wave hit industrial production in the world’s second-largest economy. Still, the results beat analysts’ estimates of a 2.7 per cent growth.

China’s economy is set to improve and is highly likely to reach a normal growth rate in 2023, Liu He, a Vice Premier, told the World Economic Forum in Davos this week.

The country’s imports are expected to increase significantly this year, Mr Liu said, adding that corporate investment will rise and household consumption will have recovered.

The data from China is "broadly positive even if it confirmed one of the slowest annual growth rates in decades”, Craig Erlam, senior market analyst at Oanda, said.

“The prospect of a soft landing in the US and a shallower economic hit in China from the Covid transition, not to mention a strong rebound, has driven the latest rebound in crude prices,” said Mr Erlam.

Earlier on Tuesday, Opec Secretary General Haitham Al Ghais told Bloomberg TV that the group was “very bullish” on China, which could drive a 500,000-bpd growth in oil demand this year.

Addressing talks of a supply deficit in the second half of 2023, Mr Al Ghais said the situation would become clearer after the Lunar New Year in China.

“There are many fluid factors moving together at the same time, whatever it takes to manage the market and keep it stable — we will do.”

Opec has stuck to its global oil demand forecast for the year.

The group still expects oil demand to grow by 2.2 million barrels a day this year, which is lower than its estimate of 2.5 million bpd growth for 2022.

On Wednesday, in its monthly oil outlook report, the International Energy Agency said it expects global oil demand to rise to an all-time high in 2023 on the back of China relaxing its Covid-19 restrictions, which could increase crude prices in the second half of the year.

Demand for crude oil could rise 1.9 million barrels a day to 101.7 million barrels a day, the Paris-based IEA said.

“Two wild cards dominate the 2023 oil market outlook: Russia and China,” the report said.