Oil Maintains Rally As Experts Disagree About Impact Of OPEC Cuts

Meanwhile, Biden claims "There's a lot of alternatives" to take: File Image/Pixabay

In the wake of the Organization of the Petroleum Exporting Countries (OPEC) mandating a 2 million barrels per day (bpd) output cut on the pretext that it wants to stabilize the global energy market, oil prices on Thursday settled up again, by about 1 percent, while Washington claimed to be considering a host of compensatory measures.

Brent settled up $1.05 at $94.42 per barrel, while West Texas Intermediate settled up 69 cents at $88.45 per barrel.

Typical of the concern over OPEC's mandate were observations made by Jorge Leon, senior vice president at Rystad Energy, who said that "the price impact of the announced measures will be significant: by December this year Brent would reach over $100/bbl, up from our earlier call for $89."

However, Abdulaziz bin Salman, energy minister for Saudi Arabia, said the real supply cut would be about 1 million to 1.1 million bpd due to several members' inability to currently reach their production quotas, thus throwing into question exactly how damaging the cuts would be globally.

Bob Yawger, director of energy futures at Mizuho, said, "The countries that were under producing are not going to cut production; maybe Saudi Arabia, the UAE, Kuwait, and the 'little train that could' Kazakhstan may cut production to new quota, but I doubt anybody else will."

John Kilduff, founding partner at Again Capital, added that higher oil prices would likely cut demand, which in turn could cap price gains, effectively working against OPEC's other stated motivation for the production cuts: that low prices were adversely affecting the budgets of some of its members.

As for the White House, U.S. president Joe Biden said his administration was looking at ways to keep prices from rising: "There's a lot of alternatives; we haven't made up our minds yet."

Amos Hochstein, Biden's top energy advisor, elaborated, "We're going to take a multitude of steps with the private sector in the United States, with our allies, with the SPR, and we're going to talk to Congress about what kind of tools we may need; we're not quite sure what we need, but we're going to have that conversation to make sure we have every tool available to us."

Whether or not the OPEC cuts have a deep impact on prices, they contribute to an already extremely tight market, one that compelled Morgan Stanley on Thursday to raise its oil price forecast for the first quarter of 2023, to $100 per barrel from $95 per barrel, noting: "Brent will find its way to $100 per barrel quicker than we estimated before."

Morgan Stanley also stated that "We now see the oil market in a 0.9 million bpd deficit in 2023, up from 0.2 million bpd before" but added that "Those forecasts assume that Russia's oil production will fall by 1-1.5 million bpd after the EU oil import embargo comes into force."

For its part, Daily FX said, "From a demand side global recessionary fears have not dissipated, which may give crude oil bears some fundamental support going forward."