How OPEC+ Production Cuts Influenced Crude Oil Prices in the Past Three Years?

Oil surged at the week’s open after OPEC+ unexpectedly announced crude output cuts on Sunday, with Saudi Arabia leading the way with 500,000 barrels a day of reductions from May.

West Texas Intermediate rose above $80 a barrel, extending two weeks of gains as expectations of a tighter market added to easing concerns over a global banking crisis. Historical data in the past three years suggested that crude prices mostly went up after OPEC cuts. April 2020 was an exception under COVID hit.

Goldman Sachs says crude oil production cuts by OPEC could result in a significantly larger deficit in the market, driving a rally in prices to $100 per barrel by April 2024, and raising the group's pricing power.

Aside from a reduction from Saudi Arabia and other Middle Eastern countries, Russia also said it would keep production at a reduced level. News of the cuts overshadowed relief from an agreement between Iraq’s semi-autonomous Kurdistan region and the federal government to resume oil exports through Turkey this week.

Goldman said it sees "elevated OPEC pricing power - the ability to raise prices without significantly hurting its demand - as the key economic driver", and estimates that the production cut will raise OPEC+ revenues as the boost to prices more than offsets the drop in volumes.

Goldman also said it expects a nearly 90% implementation rate for the 1.66 million bpd production cut plan, reasoning that countries that announced an additional cut have a strong compliance track record, and had implemented nearly 90% of the October 2022 cut by January 2023.

The bank further reiterated its view that the market will return to sustained deficits from June onward given rapid emerging market growth, falling Russia supply, and sluggish U.S. supply.

The OPEC+ decision took the financial market by surprise.

"If fully delivered, the announced cut would further tighten an already fundamentally tight oil market, driving the Brent benchmark towards $100 per barrel sooner than previously expected, and would push the price to around $110 per barrel this summer," said Jorge Leon, senior vice president at Rystad Energy。

Crude is entering April after capping its worst first-quarter drop since 2020, when the pandemic pummeled demand. Futures whipsawed as traders weighed near-term risks from a banking crisis to strikes in France, although there is longer-term optimism over China’s rebound underpinning higher prices over the rest of the year.

The production cuts will take effect in May, which is "right ahead of Memorial Day and the start of U.S. driving season," said Stacey Morris, head of energy research with VettaFi.

Given that, "it could be another summer with painful prices at the [gasoline] pump," she said.

Still, some traders may interpret the OPEC+ cut as a sign of weaker than expected demand for physical markets, given that OPEC+ possesses “some of the best information available in regards to the global physical oil markets,” said Rob Thummel, portfolio manager at Tortoise.

However, “ we still expect global oil demand to accelerate throughout 2023, reaching a record high in the second half the year,” he said.

Global oil inventories are below normal and will likely “remain below normal as higher demand and less supply deplete inventories throughout the year,” Thummel said, noting that Tortoise expects oil prices to be range bound between $85 and $95 for the year.