SPECIAL REPORT: OPEC CONTROLS THE SPICE
Much to Goldman’s Surprise, OPEC cuts Oil Production
Much to Goldman’s Surprise, OPEC cuts Oil Production
in collab with BKK
Goldman, almost as fast as OPEC made their announcement this weekend put out a report (at bottom) enumerating the reasons for the OPEC production cuts.
GOLDMAN’S BOTTOM LINE:
Nine members of OPEC+ announced a surprise “voluntary” collective output cut totaling 1.66mn b/d which will take effect from May till the end of 2023. As we have argued, OPEC+ has very significant pricing power relative to the past, and today’s surprise cut is consistent with their new doctrine to act pre-emptively because they can without significant losses in market share. As we already assumed that Russia cuts would extend into 2023H2, we are lowering our OPEC+ production end-2023 forecast by 1.1mb/d.
They list seven key points regarding the decision. Two stick out to us.
1- OPEC IS TIRED OF DOE PULLING ITS BID
First, the banks note the political aspect of the decision. The US DOE has been pulling its bid for Oil, playing Cancel-if-Close for months now. Oil was supposed to be bought to refill the SPR. And it wasn’t. OPEC decided enough was enough. Friend of GoldFix Brynne Kelly had noted this several times the last month or so in her reports.
Goldman:
On the political side, SPR releases in the US—which announced a surprising 26m b additional release in February—and in France (following strikes), and the refusal to refill the US SPR in fiscal year 2023 (although WTI reached lows that were previously characterized as sufficient to refill) may have contributed to the OPEC+decision to cut
2- MARGINAL BARRELS ARE NOT SHALE ANYMORE
The second point in focus is a comment on the relative in-elasticity of supply for oil worldwide. We all know about the inelastic demand for sure. But inelastic supply?
Specifically, the bank notes OPEC believes non-OPEC oil supply is pretty inelastic right now. They can’t hit a switch like ARAMCO can.
We looked at the TD Oil report (also at bottom) to flesh this information out a little more. Here is what was found:
Not only is it harder to hit a switch on Shale than before, it is also less of an ROI than in the past.
Back to Goldman:
OPEC+ has very significant pricing power relative to the past given its elevated market share, inelastic non-OPEC supply, and inelastic demand.
They are right. Not only are newer shale wells pulling up less oil, but the banking crisis destroys an important source of funding for shale oil prospecting. Peak shale supply is now being felt.. also something Brynne noted recently.
Shale Oil is also a real estate play. Real estate loans, as we all have learned lately, are mostly done by regional banks. Regional banks are all underwater. No new credit, no new oil on the shale side. The US Gov’t may have to bend the knee a little to the majors if it wants more oil now.
Taken together OPEC is saying: We control the spice
TD Oil as GS Companion Piece
While the GS report is the talk of the moment; We strongly urge a look at the TD report as a companion piece. The two pieces seem to corroborate each other without plagiarizing. Here are a couple examples:
GS notes non-OPEC supply is less elastic…
…while TD notes newer non OPEC wells are not as productive
GS notes OPEC has increasing pricing power…
…while TD notes fewer nations have spare capacity than before.. and those are OPEC+ nations now.
Incorporating this significantly lower OPEC+ supply, slightly lower demand, and the modest French SPR release, Goldman has nudged up it’s Brent forecasts by $5/bbl to $95/bbl (vs. 90 previously) for December 2023, and to $100 (vs. 97) for December 2024.
It’s almost like they were short 4 weeks ago, and got long last week… almost. Now we wait and see what Jerome Powell does… This is, after all OPEC vs the FED still
GS, TD, and TS Lombard’s comment (a decidedly less bullish but well reasoned take) below