The Impact of OPEC Cuts on Global Crude Balance
Oct. 14, 2022
OPEC+ decided at their October meeting in Vienna to reduce production by 2 million b/d beginning in November. The rationale given was to spur a recovery in crude prices despite calls from the US to pump additional supply to help ease pressure on the global economy. OPEC has stated that higher oil prices are necessary to kickstart fresh investments in oil production although other market participants like the IEA are skeptical, taking the position that constraints among oil producers meant additional supplies would be scant. The reality remains that OPEC’s own members are currently struggling with a lack of spare capacity, but also with meeting their existing production quotas – although the latter is mostly prevalent on a few members that face technical and/or geopolitical challenges.
Despite the immediate supply cut in November, overall OPEC+ production is forecast to gradually rebound through Q1 2023 with countries such as Libya and Nigeria increasing their output. Interestingly, the latest JBC Energy forecasts point to Russia maintaining approximately 9.7 million b/d of supply on average for the first quarter of 2023. This, combined with the fact that the alliance has been undershooting their previous production quotas lead us to conclude that there is evidence that despite a large headline number of cutting 2 million b/d, the real market impact will be less drastic.
However, we point out that the cuts, although not the only factor, are likely going to have a significant impact on global crude balances. The latest JBC Energy data reveals that the previous deficit of 698,000 b/d in December is projected to enlarge by 1.3 million b/d and the small buildup previously expected for Q1 2023 is now forecasted as an average deficit of 342,000 b/d (Figure 1).
While in the very short term, the impact on DPP tanker demand is likely to be tempered, it is possible that we are going to see a downturn towards the end of 2022 and beginning of 2023, especially if combined with the stop of the US SPR releases – although we should note that the recent OPEC+ development may sway the US Administration towards extending the releases. For the longer term, we expect increasing production in the US and LATAM combined with a very low DPP tanker delivery schedule for the year will begin supporting the market again as soon as the second half of 2023.
Figure 1 – OPEC+ Production and Global Crude Oil Balance
Source: McQuilling Services, JBC Energy
Share
Comments
You need to login to comment.
