Quick Context: Surprise! An OPEC+ Cut
The first honest-to-God surprise OPEC cut in ages materially tightens the outlook for what had been lackluster year-to-date global oil balances.
This is an event-driven Quick Context report. There will no doubt be more to say on this development as we progress through the week and toward the start of these cuts in May.
Become a paid subscriber today to view this full Quick Context report on the surprise OPEC+ cut and join me in my hunt for ever-deeper oil & gas market context.
If you’re already subscribed and/or appreciate the free chart and summary, hitting the LIKE button is one of the best ways to support my ongoing research.
(Taken from the March edition of the Global Oil Data Deck)
OPEC+ announced a surprise 1.16 MMbpd production cut to take effect in May, a stark departure from its pre-weekend steady-as-she-goes guidance; Russia announced an extension of its 0.5 MMbpd “cut” that was previously set to expire at the end of June, which brings the total reduction to 1.66 MMbpd vs the pre-weekend outlook.
This is undoubtedly a bullish development and will serve to materially expedite the already-expected tightening of balances through the latter half of the year; however, it is also far from a signal of underlying market strength—this big-deal cut only brought us back to around $85/bbl Brent or roughly the mid-point of pre-banking crisis trading year-to-date.
Given the wishy-washiness of both Russia’s ongoing “cut” and last year’s OPEC+ papercut, markets are going to want to wait to see the actual realized barrel loss beginning in May before committing to further price gains.
OPEC+ members shocked markets on Sunday morning by announcing a series of voluntary but obviously coordinated production cuts amounting to some 1.16 MMbpd across the producer group. This was the first honest-to-God surprise OPEC+ cut in ages following years of what felt like a regular pattern of cacophonous pre-meeting rumours and trial ballooning. And, boy, was that pre-meeting rumour mill wrong this time: articles as recently as Friday quoted multiple confident OPEC sources claiming no material course correction from the preexisting plan to maintain current 2 MMbpd quota cuts through the end of the year. Moscow also announced that it was joining its OPEC brethren and would maintain its 500 kbpd “voluntary”—and entirely wishy-washy—cuts, currently set to expire in June, until the end of the year. OPEC+’s Joint Ministerial Monitoring Committee (JMMC) met virtually as planned today, but unsurprisingly the meeting yielded little intrigue and was more-or-less a rubber “thanks for your contribution” stamp confirming the weekend’s “voluntary” cuts.
(Prompt Brent futures contract; Source: Bloomberg Terminal)
The announcements, which came with markets closed, prompted a ~$6/bbl (8%) jump in crude prices when markets opened eight-or-so hours later. While $6/bbl is certainly a big overnight jump, a realized 1.1 MMbpd supply cut next month coming out of the first honest-to-god surprise OPEC is bound to yield something more than that when—or if—it hits the market.
So, what prompted this abrupt about-face, what does it say about the state of the current oil market, and how does this change the outlook going forward?