The Opec+ alliance of oil-producing countries will most likely continue with its existing production quotas at its meeting on Sunday, despite a recent slump in crude prices driven by growing macroeconomic concerns, analysts and banks have said.
Brent, the benchmark for two thirds of the world’s oil, has lost about 15 per cent of its value this year as weak economic growth in the world's top oil-consuming nations – the US and China – dampens the outlook for fuel demand.
Investor fears over the US debt ceiling talks and the possibility of a default in the world’s largest economy have also weighed on oil prices.
Brent crossed $85 a barrel in April after some Opec+ producers surprised markets by announcing voluntary output cuts of 1.16 million barrels per day, taking the group’s total production curbs to 3.66 million bpd, or 3.7 per cent of global demand.
“We expect no policy change at this meeting, especially as the voluntary cuts announced in April have only just begun,” Energy Aspects analysts said in a research note.
“Although the group will not have a full picture of May production, nor the effect of the newly implemented voluntary cuts, there is speculation that further production cuts may be discussed,” the consultancy said.
At an event in Qatar recently, Saudi Arabia's Energy Minister told oil market short sellers to “watch out”, which was seen by some traders as a signal for further output reductions.
“I keep advising them that they will be 'ouching'. They did 'ouch' in April,” Prince Abdulaziz bin Salman said at the time.
Short sellers strategically position themselves to make a profit if prices decline. They achieve this by selling borrowed assets in the hope of repurchasing them at a lower price.
However, if oil prices rally on an unexpected Opec+ cut, they face a loss.
Speculative short positions in crude oil reached a two-year high of 233 million barrels in the week ending May 16, according to Ole Hansen, head of commodity strategy at Saxo Bank.
This figure is 40 million barrels higher than the previous gross short recorded before April 2, when the latest output cuts were announced.
The Saudi minister’s comments helped to lift prices before a sudden turnaround after Russia’s Deputy Prime Minister Novak said Opec+ was likely to stick to existing production targets at their meeting.
“We expect Saudi Arabia and Opec+ to remain vigilant and step in quickly with additional measures should macro conditions deteriorate further. But the time for such a move is not a given yet,” Energy Aspects said.
Meanwhile, traders are closely looking for signs of falling Russian exports after the country extended its output cut of 500,000 bpd until the end of the year.
Russian exports surged to 8.3 million bpd in April, the highest since Moscow’s invasion of Ukraine last year, the International Energy Agency said in its latest oil market report.
The agency, which attributed the rise in exports to higher production volumes, said that by its estimates, Russia did not adhere to the output curbs.
However, Swiss lender UBS said the discrepancy between Russia’s stated production cuts and resilient seaborne exports may be due to changes in pipeline exports, domestic oil demand and exports of refined products.
UBS strategist Giovanni Staunovo told The National that Sunday’s Opec+ meeting was “difficult to call”.
“The latest voluntary production cuts have been only recently implemented so need time to impact market balances. But on the other hand, there are ongoing concerns driven by economic growth concerns in the US and China,” Mr Staunovo said.
The IEA has predicted that global crude demand will hit record levels this year on the back of an economic recovery in China, the world’s second-largest economy and top crude importer.
But economic growth in the Asian country has been largely uneven since it lifted Covid-19 restrictions earlier this year.
“The non-synchronised recovery in Chinese economic growth is perhaps the biggest challenge for the oil market,” Energy Aspects said. “Not all sectors have risen and definitely not at the same pace.”
Meanwhile, Japanese Bank MUFG and the UAE’s Emirates NBD do not expect any production cuts as the physical market for oil is expected to tighten in the second half of the year.
“Our base case … is for the group to deliver a hawkish message but not implement another round of cuts,” said Ehsan Khoman, head of commodities, ESG and emerging markets at MUFG.
“Opec’s own estimates show a significant supply shortage in the second half of 2023 and any further reductions in actual output would only exacerbate tight fundamentals.”
Rystad Energy said that the “unresponsiveness” of US shale could be seen as a positive for the group, as Opec+ could cut production and support prices without the risk of losing market share.
US shale output is set for a rapid decline in the coming years due to maturing oilfields and as companies focus more on profitability and returning money to shareholders.
“However, the impact of higher oil prices on the global economy will weigh heavily on the ministers’ minds,” said Jorge Leon, senior vice president of oil market research at Rystad Energy.
“High oil prices would fuel inflation in the West right when central banks are starting to see inflation gradually recede,” Mr Leon said.
“This could prompt central banks to continue increasing interest rates, a detrimental move for the global economy and oil demand.”