Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Will OPEC finally address the elephant in the room?
Ole Hansen
Head of Commodity Strategy
Summary: OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event. This following a report from the Wall Street Journal that some OPEC members are considering exempting Russia from its oil-production deal, thereby paving the way for others, especially Saudi Arabia and the UAE, to pump more
Crude oil dropped sharply on Tuesday after the WSJ reported some OPEC members are considering exempting Russia from its oil-production deal, thereby paving the way for others, especially Saudi Arabia and the UAE, to pump more. The 23-nation alliance led by Saudi Arabia is due to finish restoring production halted by the pandemic by the end of September. During the past six months, and especially accelerated following Putin’s attack on Ukraine, the group has increasingly been struggling to deliver the agreed increases, with other producers struggling due to lack of investments, weather problems and rising production costs.
Considering the deal is about to end soon, Saudi Arabia and other producers with available spare capacity may opt to increase production sooner than expected in order to dampen record fuel prices and with that the risk of demand being negatively impacted. Oil producers have historically been better at controlling rising prices by raising production than supporting falling prices by the painful process of cutting production at a time when lower prices drive down revenues, the latter being a situation Saudi Arabia and most other producers would like to avoid.
The coming months are likely to be particularly challenging with EU’s import ban on seaborne Russian crude, as well as the UK and EU agreing a co-ordinated ban on insuring ships carrying Russing oil, the prospect for a revival in Chinese demand, the summer driving season and increased demand towards cooling.
Even if the deal is being put on hold, we believe the negative price impact could be limited as the market want to see whether Saudi Arabia, UAE and a few others have the spare capacity needed to boost production. So, while it may be high on signal value, the actual impact in terms of additional barrels reaching the market may not be enough to prevent prices from staying elevated. OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event.
Brent briefly had a look above $120 per barrel this week, a level we highlighted as a potential ceiling in our Q2 outlook. Whether the price will stay below very much depends on OPEC’s ability to soothe a market focusing on tight supply and robust demand. Short-term the market will focus on the resistance-turned-support level at $114.80/b.
Note: EIA’s weekly stock report has been delayed until Thursday with the API reporting tonight, also a day later than usual due to Monday’s Memorial holiday.
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