The OPEC narrative for 2022 was largely about the realities of supply and demand against the backdrop of a post-pandemic war that sparked sanctions and a European energy crisis with the counterweight of a Chinese covid crisis.
From the Saudi standpoint, OPEC’s move to cut production by 2 million barrels per day in November last year – while highly controversial in Washington – served to stabilize the market.
From the U.S. standpoint, it was all about politics, at a time when the Biden administration had been doing everything in its power – begging, threatening, cajoling – to get OPEC to increase production to bring down oil prices. When OPEC+ responded not only by refusing to increase production but by actually cutting production, it was viewed in Washington as politically motivated – even a concession to Moscow.
Numerous articles then began to appear in the Middle Eastern press most prolifically, with GCC officials explaining how OPEC’s moves throughout the year worked to stabilize markets.
In October, Saudi Energy Minister Prince Abdulaziz bin Salman bin Abdulaziz told the Saudi state news agency, SPA: “As I have emphasized multiple times, in OPEC+ we leave politics out of our decision-making process, out of our assessments and forecasting, and we focus solely on market fundamentals. This enables us to assess situations in a more objective manner and with much more clarity and this in turn enhances our credibility.”
The rationale, based on what the Saudis call “the Ukraine crisis”, which prompted predictions of major supply losses that could see some 3 million bpd taken off the market. Those predictions caused panic and led to oil price volatility. As the prince points out, “these projected losses did not materialize”.
The International Monetary Fund (IMF), in a September 2022 paper, notes: “Cyclical oil price fluctuations (as opposed to persistent shifts in levels) drive OPEC’s decisions, suggesting that OPEC’s objective is to stabilize the oil price rather than countering fundamental shifts in demand and supply.”
Now, with a war still raging, the million-dollar question is, what does OPEC+ want now, and will it get what it wants by pursuing its stated strategy of patient market stabilization?
In its new 2023 oil market outlook, Energy Intelligence posits that OPEC+ is targeting a calmer market for 2023, and a likely price range target of around $80-$90 per barrel, and will, as such, likely move to act if oil starts rising above $100, which would be seen as too volatile and reminiscent of earlier in 2022.
Likewise, Energy Intel suggests that OPEC+ will proceed with extra caution this year, noting that while there might be “some tweaks” to the 2 million bpd output cut last November, “any output increase would require a clear demand pickup or supply disruption (e.g. Russia), and is unlikely to be agreed pre-emptively”.
The report also predicts that we will only see a bigger cut in output if a recession has a significant impact on demand.
Again, while there is a lot of recent talk of a global recession, with an apparent two-thirds of business leaders meeting at the 2023 World Economic Forum in Davos saying it is likely this year, OPEC would not likely act preemptively on this.
And in the meantime, Energy Intel predicts that strong growth from Norway, the U.S., Brazil, and others would make an OPEC+ output increase more challenging, as would any issues with the cartel’s “dwindling” spare capacity.
While the still-raging war in Ukraine will continue to rock the geopolitical boat, Energy Intel sees less room for a renewal of U.S.-Saudi tensions right now, which is less likely when oil prices are at their current lows.
The key aspects of the market that OPEC+ will be monitoring will be Russian oil production and how sanctions and new price caps really affect the numbers. While there have been many reports of sanctions hitting Russian revenues – and plenty suggesting the opposite – a recent account from Bloomberg said Russia’s seaborne crude exports managed to hit their highest level since April last week, which will suggest to OPEC that Moscow will ride this out.
But it won’t just be geopolitics that OPEC watches closely. According to Energy Intel, there are some internal cartel issues that could surface, including the potential for the UAE to (once again) become emboldened enough to push for higher quotes, as well as what the report refers to as OPEC’s underlying problem of “unrealistic baseline quotas”.
Early on Tuesday, better-than-expected data on Chinese GDP growth may give some support to oil prices, but with COVID uncertainty still putting a chokehold on demand predictions, oil was not expected to respond excessively to this news. The market was also waiting with bated breath for OPEC’s own 2023 oil market outlook later in the day.