OPEC’s unusually high pricing power puts a floor under oil prices

Published on13 APR 2023

OPEC’s surprise announcement of a cut in oil production this month shows the group is taking advantage of its ability to raise oil prices without significantly denting demand, according to our economists.

Goldman Sachs Research lowered its year-end forecast for OPEC+ production, excluding Russia, by 1 million barrels a day after the announcement of voluntary production cuts by nine member countries including Saudi Arabia, Kuwait and the UAE.

A lack of investment in oil production in other parts of the world, combined with the elevated market share of the OPEC+ countries and inelastic demand has given OPEC the ability to put a floor under prices, energy economist Daan Struyven wrote in a report on what he terms “the OPEC put.” If oil demand is strong, the group can increase production, but if demand is soft, it can keep production restrained and limit the downside for prices.

Oil prices had been falling since the failure of Silicon Valley Bank, but OPEC+’s surprise intervention spurred a rally of about $5 a barrel in the initial days following the news. An energy official in Saudi Arabia described OPEC+’s cut as a “precautionary measure aimed at supporting the stability of the oil market.”

Goldman Sachs Research increased its price forecast for Brent crude, the global benchmark, to $95 ($90 previously) per barrel by the end of 2023. A combination of significantly lower OPEC+ supply, slightly lower global demand and the modest release of French strategic petroleum reserves were factors in the forecast change.

The cut in oil output will likely, on net, increase Saudi Arabia and OPEC+ oil revenues, according to GS Research models. Our economists estimate that a 7% boost in oil prices because of this cut, and the modest reduction in production costs, will more than offset the losses from OPEC+ selling less oil.

Political considerations likely played a role in the decision, Struyven wrote. The U.S. announced a surprising 26-million-barrel additional release of its strategic petroleum reserve in February and said it will not refill its reserves in fiscal year 2023, while France (following strikes) also released petroleum reserves.

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