Surprise output cut reveals Opec+ price floor: Analysts

A surprise decision by eight Opec+ members to rein in their crude production shows the coalition is firmly set on defending an oil price floor above $80/bl, according to bank analysts.

The eight countries, including Opec's de facto leader Saudi Arabia, announced on 2 April that they will make a collective 1.16mn b/d "voluntary" cut from May until the end of the year. The decision, described by the Saudi oil ministry as "a precautionary measure aimed at supporting the stability of the oil market", caught most observers off guard, with Dutch multinational bank ING calling it "fairly odd".

Oil prices had been recovering after jitters in the banking sector helped drive Brent crude futures down to a 15-month intraday low of around $70/bl in mid-March. Furthermore, key supply and demand indicators show a tightening market in the second half of the year, with Opec itself forecasting global oil demand growth of 1.75mn b/d in July-December. Front-month Ice Brent surged by over 5pc in response to the cuts in early trading today, hitting $86/bl at one point.

"The cuts suggest Opec+ was not content with Brent trading in the $70-80/bl range," ING said. "It would appear it wants the floor for the market at even higher levels." Consultancy Rystad Energy has a similar view: "From a supply-side perspective, the cuts signal the group is willing to defend a price floor well above $80/bl and prioritise revenue versus market share."

Opec+ consistently denies that it has a specific oil price target and insists that its production policy is governed only by oil market fundamentals. But even before the cuts were announced, TotalEnergies' chief executive Patrick Pouyanne suggested that "Opec countries want to maintain oil above $80/bl".

All eight Opec+ members taking part in the voluntary cut are producing close to their quotas already, which means the announced reductions will probably take at least 1mn b/d off the market starting from May, equal to around 1pc of world oil demand.

Saudi Arabia, which had for weeks been vehemently arguing that Opec+ would stick to its existing output policy, leads the pack with a 500,000 b/d cut, followed by Iraq with 211,000 b/d, the UAE with 144,000 b/d and Kuwait with 128,000 b/d. Russia, the alliance's key non-Opec member, is already implementing its own unilateral 500,000 b/d cut. To coincide with yesterday's announcements, Moscow said it plans to keep its cut in place until the end of the year.

Following the decision, several bank analysts have raised their 2023 oil price forecasts, with $100/bl now seen as increasingly likely during the second half of the year.

By Aydin Calik