Analysts on Wall Street are becoming far more bullish on oil prices, after OPEC+ announced voluntary output cuts totaling 1.66 million barrel per day.
The cuts will come into effect starting in May and are expected to last until the end of 2023.
Saudi Arabia stated that the production cut is a “precautionary measure aimed at supporting the stability of the oil market”.
Oil prices soared more than 6% after the news, with a barrel of WTI crude rising above $80.
The United States Oil ETF is up 5.7% in pre-market session.
The oil cartel’s action was similar to the one made in October 2022, but it now risks amplifying market disruptions because to a resurgence in demand amidst China’s reopening and exceptionally low levels of stocks in the U.S., with the US Strategic Petroleum Reserve stockpiles running at their lowest in forty years.
Here are the latest takeaways on oil from economists and analysts of major Wall Street’s banks.
Goldman Sachs upgraded its December 2023 Brent price forecasts from $90 to $95 a barrel. The bank has also raised the 2024 price projection for Brent from $97 to $100 a barrel.
“OPEC+ has very significant pricing power relative to the past given its elevated market share,” Goldman Sachs’ commodities team said in a note.
Oil price increases after tightening actions from OPEC+ can be stronger when the market positioning is short. The crude managed money long-short ratio remains very low at 2.5, the lowest since December 2022, and the Brent long-short ratio edged down further in Friday’s CFTC report.
The price of oil traded just above $80 a barrel as prices in the United States keep rising up. California remains the highest in the price of oil across the nation.
“Overall, we think that oil price says might increase by around 10% going forward compared to what we had,” says Jorge Leon, senior vice president of Rystad Energy. “That’s a significant increase.”
According to Francisco Blanch, head of commodity and derivatives research at Bank of America, “any unexpected 1 million barrel per day change in supply or demand conditions can impact prices between $20 and $25 per barrel over the course of one year.”
However, BofA added that it is uncertain how much of the planned cuts would result in real volume reductions, given OPEC’s history of failing to fully implement agreed-upon cuts. BofA maintains its Brent projection of more than $90 per barrel in the second part of the year.
Warren Patterson, Head of Commodities Strategy at ING Groep N.V., said that these OPEC+ cuts could push the deficit to in excess of 2 million barrels per day for the rest of the year.
ING raised its Brent price forecasts from $97/bbl to $101/bbl for the second half of 2023.
Helima Croft, head of commodities strategy at RBC Capital Markets, thinks that the OPEC+ action was revenge from Saudi Arabia following a worsening in diplomatic ties with the United States. The Biden administration’s public rejection of additional petroleum purchases to restock SPR last week may not have been well welcomed by the Saudi Arabian Kingdom.
“Today’s move, like the October cut, can be read as another clear signal that Saudi Arabia and its OPEC partners will seek to short circuit further macro sell-offs and that Jay Powell is not the only central banker that matters,” the analyst stated.
Raymond James predicts that WTI will average $90 per barrel in 2023, topping in 4Q23 at $105. Even in the event of a recession in advanced economies, the house expects structurally higher “recessionary crude” prices due to low global inventories (and the need to replenish inventories), growth in non-OECD demand, gas-to-oil switching, and continued global upstream underinvestment due to tighter lending standards and macroeconomic concerns.
“The cut is unnecessary, risky and could reignite inflation concerns.” It strengthens our bullish oil outlook and the market will take time to process this shock and recalibrate, BNP Paribas said in a note.
Produced in association with Benzinga