OPEC+ Production Cuts
April 14, 2023
Saudi Arabia and other OPEC+ countries announced they would cut production further by 1.16 million b/d from May to December 2023. This output cut adds to a reduction of 2 million b/d agreed to during the 33rd ministerial meeting in October 2022. However, McQuilling holds a different view than others on the potential reason for this sudden production cut – more due to the potential for a protracted recession on the horizon instead of its revenge for the United State not filling SPR as promised. Based on the long-term macro-observation, when OPEC cuts lead to a crude supply declines y-o-y, there is an 80% historical probability that oil demand will also be lower y-o-y. Of these 1.16 million b/d cuts, OPEC+ countries in the Middle East contributed the largest portion of the cut – a total crude supply reduction of 983,000 b/d is expected to come from this region.
When analyzing the impact on crude exports, crude supply is only half of the story. Our statistical model has indicated a close correlation between export volume and crude balances, which is also driven by crude demand and imports. Given the direction of cracks particularly for distillates and of course the OPEC policy changes, we project crude demand in the Middle East to decline by 581,000 b/d in the 2H of this year according to JBC Energy/Kpler. The Middle East region is anticipated to add 500,000 b/d capacity over the Summer as the Jizan and Al Zour refineries kick into high gear. However, we may see this level reduced by 20% or more, increasing the crude length further and reducing the negative tanker demand impact. Crude import from Russia is likely to continue and have the potential to slightly increase by 17,000 b/d. Therefore, we calculated the Middle East crude balance to tighten by only 385,000 b/d, resulting in a less severe impact on crude export volume on tanker demand. As a large portion of the Eastbound cargoes are under term contracts, we anticipate a much bigger impact on Westbound volumes including Middle East>Europe and Middle East>US Gulf and West Coast.
To statistically measure the OPEC policy impact on global crude tanker demand, we have further broken down the export reduction of 385,000 b/d from the Middle East to equivalent vessel demand for each segment. These statistics will be shared in our Weekly Highlight in the following week.
Figure 1: OPEC+ Production Cuts
Source: McQuilling Services; OPEC, Kpler
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