Production cuts and rising demand expectations drive up international oil prices.
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Recently, major oil-producing countries have continued to release their determination to implement production reduction measures and defend oil prices. At the same time, crude oil demand growth expectations have increased, geopolitical tensions have not eased, and international oil prices continue to receive support.
OPEC extends production cuts to push oil prices higher
The Organization of the Petroleum Exporting Countries (OPEC) decided on March 3 that a number of OPEC and non-OPEC oil-producing countries (“OPEC+”) decided to extend the voluntary production cuts of 2.2 million barrels per day in the first quarter of this year to the end of June to maintain Stability and balance in the international oil market. This production cut is an additional increase after major oil-producing countries announced voluntary production reduction measures in April last year.
Since OPEC announced the extension of production cuts, international oil prices have gradually risen, with New York oil prices and London Brent oil prices both rising by more than 5%. As of the close on April 1, the price of light crude oil futures for May delivery on the New York Mercantile Exchange closed at $83.71 per barrel. Brent crude oil futures for May delivery closed at $87.42 a barrel that day.
Analysts believe that the actions of “OPEC+” clearly demonstrate the consistency of this oil-producing group and its determination to defend oil prices in the second quarter.
According to Reuters, Russian Deputy Prime Minister Alexander Novak said on March 29 that Russia will focus on reducing crude oil production rather than crude oil exports in the second quarter, so as to reduce production equally with other “OPEC+” members.
Russia plans to gradually reduce exports and production: in April, it plans to reduce production by an additional 350,000 barrels per day and reduce exports by 121,000 barrels per day; in May, it plans to reduce production by an additional 400,000 barrels per day and reduce exports by 71,000 barrels per day; 6 In March, all additional cuts will come from oil production.
Novak said that increasing crude oil production cuts will allow all members under the “OPEC+” production reduction agreement to contribute equally. Russia is not cutting production based on volume, but in proportion to other members.
Russia said earlier in March that it would voluntarily cut supply by 471,000 barrels per day in the second quarter of this year. These cuts are in addition to the production reduction commitments reached with other “OPEC+” members and include cuts in exports and production. .
Reuters reported that Russia’s move to reduce more crude oil production than crude oil exports was unexpected. JPMorgan Chase said that this strategic change is surprising. If Russia implements its commitments, its crude oil production will drop to 9 million barrels per day by the end of June, which is equivalent to Saudi Arabia’s production. Currently, Russia’s production is about 9.5 million barrels per day.
Demand optimism picks up
Currently, expectations that demand for crude oil will continue to increase steadily in line with the long-term trend have strengthened, supporting oil prices.
Revised data released by the U.S. Department of Commerce showed that the U.S. economy grew by 3.4% in the fourth quarter of 2023, and personal consumption expenditures increased by 3.3% year-on-year, both higher than the initial values announced.
Jim Ritterbusch, president of Ritterbusch Associates of the United States, said that the strength of the stock market shows the strong performance of listed companies and implies that the U.S. economy is strong, which is conducive to driving up demand for energy products and is better than expected.
In addition, U.S. Energy Secretary Jennifer Granholm said in March that after the U.S. Strategic Petroleum Reserve (SPR) fell to a historic low last year, by the end of this year, the size of the strategic crude oil reserve will return to the large-scale release strategy two years ago. The level of crude oil reserves may be higher.
According to AFP, between September 2021 and July 2023, the United States released 274 million barrels of crude oil reserves, bringing the strategic oil reserve to a 40-year low. Starting in June 2023, the U.S. government will begin purchasing crude oil to replenish the strategic crude oil reserve. In addition, Congress canceled plans to sell 140 million barrels of crude oil reserves between 2023 and 2027, which will also promote the recovery of crude oil reserves.
As of March 8, the size of the U.S. strategic crude oil reserve was 361 million barrels, while it was 575 million barrels on March 11, 2022, which means that the United States will still purchase a large amount of crude oil from the market.
At the same time, global crude oil inventories are currently only slightly below the long-term average, but crude oil spot prices are exceeding futures prices. Analysts believe this shows that market traders expect inventories to fall further.
The data showed that as of the end of February, OECD commercial inventories of crude oil and refined products were expected to be about 75 million barrels below the seasonal average over the past decade.
Bjarne Hildrup, chief commodities analyst at Nordic Bank, said that as the global oil market is slightly undersupplied, U.S. oil inventories are expected to increase less than normal levels.
In addition, the escalation of conflicts in the Middle East is still likely to continue to provide support for oil prices in the near term. Phil Flynn, senior market analyst at Price Futures Group in the United States, said that although geopolitical factors have not yet caused major oil supply disruptions, they have undoubtedly increased transportation costs and procurement difficulties.
Tariq Zahir, head of Tyche Capital Consulting in the United States, believes that the summer driving season is approaching, coupled with instability in the Middle East and the extension of “OPEC+” production cuts, oil prices will continue to be supported.
Downside risks for oil prices remain
Some analysts pointed out that oil prices still face some downside risks. Despite additional production cuts by “OPEC+”, these cuts may be offset by rapid growth in output from non-OPEC oil-producing countries such as the United States, Canada and Brazil.
Data released by the U.S. Energy Information Administration at the end of February showed that U.S. oil and natural gas production hit a new high in December. U.S. crude oil and condensate production for the month was 413 million barrels, a sharp increase from 376 million barrels in December 2022. This means that December production reached 13.3 million barrels per day, an increase of 1.2 million barrels per day year-on-year. For the full year of 2023, U.S. crude oil and condensate production increased from 4.347 billion barrels in 2022 to 4.721 billion barrels, doubling since 2012.
In addition, there is still uncertainty about the interest rate decision-making direction of the world’s major central banks this year, and the impact on oil prices is still difficult to determine.
Rising oil prices have added to pressure on U.S. inflation. Data released by the U.S. Department of Commerce on March 29 showed that due to a sharp increase in fuel prices, the U.S. personal consumption expenditures price index (PCE) increased by 2.5% year-on-year in February, an increase of 0.1 percentage points. The increase in U.S. commodity prices in February was mainly affected by the rebound in energy prices, which increased by 2.3%.
PCE is one of the important indicators used by the Federal Reserve to measure inflation levels. The resilience shown by the U.S. economy also suggests the Federal Reserve may cut interest rates less often this year. Fed Governor Christopher Waller said last week that fewer overall rate cuts or delays would be appropriate based on recent data.
Some analysts believe that the Federal Reserve will have to wait until at least June before starting to cut interest rates, and the possibility of starting to cut interest rates in July is rising.
CME’s FedWatch tool shows that the market expects that there is less than a 65% chance that the Fed will start cutting interest rates before June this year.
A rate cut by the Federal Reserve could push the U.S. dollar lower, which would help oil prices rise in U.S. dollars.
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