This analysis is by Bloomberg Intelligence Senior Analysts Will Hares and Salih Yilmaz. It appeared first on the Bloomberg Terminal.
Brent’s dive below $75 a barrel on May 3 suggests OPEC+ may announce more output cuts to halt the slide amid sustained fears of a recession and a potential pullback in demand. The group’s voluntary reductions are designed to pre-emptively defend against a weakening macroeconomic outlook — perhaps to avoid a 2008-style price slump.
Weakening economic outlook pressures Brent Price
OPEC+ might consider more voluntary output cuts to pre-emptively protect against a weakening economic outlook and any slowdown in energy-demand growth. We believe such a decision would also aim to protect a price floor — and signal the group already has one that it’s trying to protect — by keeping the market tight, with a 2H deficit looking likely in our scenario analysis. Recessionary fears and more bearish sentiment amid renewed concerns around the US banking sector continue to be overhangs, while the lack of a significant drop in Russian production keeps the market well supplied. However, we expect OPEC+’s defensive stance and improved demand in China to form a constructive backdrop for prices this year.
Federal Reserve policy moves remain a key driver of oil-price sentiment.
Bullish analyst estimates diverge from forward curve
OPEC+’s substantial production cuts have prompted analysts to revise their oil-price expectations for this year, with consensus calling for $87 in 2023 vs. $99 last year, $71 in 2021 and $42 in 2020, based on the median estimate on CPFC <GO>. After fluctuating from $80-$130 a barrel in 2022, Brent is anticipated to average $83 in 2Q. Though the market was broadly balanced in 1H, OPEC+’s additional voluntary reduction and China’s full reopening are likely to flip it back into a deficit. Beyond this year, a notable divergence is forming between the forward curve and analysts’ expectations, with the latter becoming much more bullish.
Saudi Aramco, BP, Shell, TotalEnergies, Eni and Equinor are among the global oil majors whose profitability is tied to benchmark oil prices.
OPEC+ likely to support prices, spreads after turmoil
OPEC+’s last surprise output reduction bolstered market sentiment, nudging Brent above $85 a barrel and time spreads higher. The subsequent price reversal is likely to push the group to consider more curbs. Any move would once again aim to shift the focus away from near-term economic worries, such as spillover fears from the banking-sector turmoil. Sustained recessionary concerns and Russian oil-supply resilience despite sanctions are pressuring prices, though expected extensions to the country’s cuts until at least the end of 2023 — combined with other voluntary reductions — form a more supportive backdrop.
Brent’s one-year December-December spread fell to its lowest level since 2021 on March 16 amid Silicon Valley Bank’s collapse and apprehension about the potential impact on the demand outlook. It has risen again since.
Bloomberg
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