OPEC+ defends its surprise supply cut as being aimed at oil market “stability.” One can only imagine the glum faces as they realized they had instead teed-up an 8% price spike. Oh well, at least the extra money will offer some small consolation.
This is the second jolt from OPEC+ in the space of six months. Last October’s was done when oil was already above $90 a barrel and drew accusations of implicit meddling in US midterm elections. As it turned out, oil demand was softening and the supply cut merely cushioned a continuing decline in prices rather than ushering in a sustained rally.
The latest one may do the same — but the uncertainties and stakes are much higher.
On the one hand, this looks like short-squeezing 101. Speculative net length in crude oil futures collapsed in the wake of the failure of Silicon Valley Bank; indeed, I have argued that President Joseph R. Biden’s administration should have used the panic to make good on its plans to refill the Strategic Petroleum Reserve. In a way, OPEC+ has done the job instead and to a far greater degree, forcing money managers to cover their short positions.
Yet the big difference between today and last October is that we have had a banking crisis in between; one that seems to have quieted down a bit but remains a live concern. Central banks on a firm path to higher benchmark rates to defeat the post-pandemic inflationary surge were given reason to potentially take a breath, for fear of sparking further crises. Renewed strength in oil prices, one of the most visible setters of inflation expectations in the US via pump prices, complicates that balancing act. Average gasoline prices are 16% below where they were a year ago. But they have risen 9% so far this year and, all else equal, OPEC+ has at the very least weakened a helpful disinflationary force.
It is possible that, once again, OPEC+ sees weakness in demand that has eluded others in the oil market. Yet, if so, adding further price pressure may juice revenue in the near term only for it to weaken as consumers buckle down the line. Each cut also adds to spare capacity in the oil market. Core OPEC’s effective spare capacity had risen already from 2.4 million barrels a day last September to 3.3 million in February, according to figures from the International Energy Agency. If oil markets turn out to be weaker than the bullish expectations currently set for the second half of 2023, then that buffer will tend to reinforce bearish tendencies. And if prices instead surge, then we get back to the dilemma around inflation, financial fragility, and recession-facing central banks.
In short, OPEC+ is potentially playing with fire here. Given the timing of last year’s surprise, and the fact that oil had moved back toward $80 a barrel ahead of the latest one, it is clear that OPEC+ demands a price above that level. In addition, higher prices offer succor to Russia, Saudi Arabia’s OPEC+ partner engaged in a brutal war in Ukraine and an energy war with the West. That ongoing conflict exacerbates the pressures on what is a finely balanced economic outlook. For OPEC+, supply cuts now may add up to stability, just not necessarily of a kind others might recognize.
BLOOMBERG OPINION