OPEC output cuts to roil markets, little room for others to respond

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A surprise production cut by Saudi Arabia and other Middle East producers has caught the energy industry flat-footed and will lift global prices with little room for a coordinated response by oil-consuming nations, industry executives said on Sunday.

The group had been largely expected to stick to its already agreed upon 2 million barrel per day (bpd) cuts when its joint ministerial panel, which includes Saudi Arabia and Russia, meets on Monday. The OPEC move and Russia’s extension through year-end of cuts was a coordinated effort that signaled the OPEC+ remains in charge of global markets.

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COMMENTS:

DAN PICKERING, CO-FOUNDER, PICKERING ENERGY PARTNERS:

“It’s a meaningful surprise. There was no chatter about this pre-meeting which there usually is. Probably an indication of concern around demand and what’s happening here in the U.S. around the banking crisis. It will firm prices meaningfully. We’ll have less supply in the market, a market that was not expecting it. We’ll probably get a $10 move in crude.

“The number of options that governments around the world have to moderate a price impact are becoming more limited. It’ll be the free market that does it. There will be potential demand reductions associated with price. If prices were to run to $100, $120 (per barrel) level again, then we could see the same demand destruction as when U.S. gasoline went to $5/gallon. That’s the way the market is going to offset these production cuts, through price and demand. Unlikely to be through increasing strategic SPR releases.”

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ANDY LIPOW, PRESIDENT, LIPOW OIL ASSOCIATES

“It’s very significant that the majority of the production cuts are coming from the core OPEC members. It does indicate how concerned they are with these lower oil prices and is in spite of their previous pronouncement to maintain the status quo for some time.

“OPEC is clearly concerned about lower oil prices impacting on their individual government budgets. They needed to take some action. The 1 million barrel per day cut is likely to be from production quotas and result in an actual production cut of somewhat less.

“The moral of the story is that OPEC+ is monitoring the oil market on a daily basis and is more than willing to take preemptive action to support prices.”

ROBERT MCNALLY, PRESIDENT, RAPIDAN ENERGY GROUP:

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“One thing that’s clear is everyone was taken by surprise. This is the biggest surprise since January 2021” when OPEC+ disclosed a gradual increase in output follow COVID cuts.

GIACOMO ROMEO, ENERGY ANALYST, JEFFERIES

“The new cut, if fully implemented by the group, should allow material inventory draws already in 2Q (previously expected from early 3Q). The only potential downside to this decision is that bears in the market could perceive the cut as a validation of the recent demand concerns.

“Additionally, compliance with the new targets could become an issue: the UAE has been producing ~200kb/d (200,000 barrels per day) above its target for a few months and Russian production in March did not see the full 500kb/d cut that was announced in February.

(Reporting by Gary McWilliams; Editing by Lisa Shumaker)