Crude oil can hit $100 a barrel if production cuts continue: Analysts

The knee-jerk reaction to the surprise 1.16 million barrels per day (bpd) output cut by Opec+ oil producing countries saw Brent crude oil prices climb 6.4 per cent to over $85 a barrel intraday on Monday.

Analysts believe prices could stay firm and inch towards $100 a barrel as the year progresses in case the oil cartel continues to cut production amid strong demand.

Opec+ includes the 13 members of the Organization of the Petroleum Exporting Countries (Opec) like Iraq, Iran, Kuwait, Saudi Arabia, and others who formed a coalition with it in 2016 like Kazakhstan, Malaysia, Mexico, Oman, and Russian.

According to G Chokkalingam, founder and head of research at Equinomics Research, the cut is a setback for the global economy, and India especially, amid fears that the monsoon may be affected by the El Niño phenomenon.

Chokkalingam said India and China were likely to see a pickup in economic growth. “The significant oil output cut will lead to a rise in Brent oil close to $90 a barrel in the next few months and it could breach the $100 mark by 2023-end. It can even hit $110 a barrel by 2023-end, unless the US and Europe continue with hikes in rates throughout 2023 and pull down their economies into recession or near contraction,” he said. Chokkalingam cautioned that any rise in Brent oil prices beyond $120 a barrel would pull down global equities significantly.

Others, too, believe that $100 a barrel could become a reality. Nigel Green, chief executive officer of deVere Group, a global consulting firm that has nearly $12 billion worth of assets under management, said the impact of the cut would be significant as it comes at a time when supply was already expected to be tight in the second half of 2023.

“The production cuts could see oil prices close to $100 a barrel due to demand from a reopening China and as Russia has slashed production due to sanctions from the West. The dramatic cut will only add to pressing global inflationary squeezes,” he said.

Vandana Hari, founder, Vanda Insights, said the markets would process the impact in stages, over the coming weeks and months. “While a 1.15 million barrels per day (bpd) reduction in supply – as opposed to target – is sizable, there is a flip side to it too, which is currently in the shadows; i.e. the boomerang from the chain effect of higher oil prices on inflation, central banks’ policy tightening, global economic prospects, and in turn, global oil demand,” said Vandana Hari, founder, Vanda Insights.

The new production cut was led by Saudi Arabia (output reduced by 500,000 barrels), which analysts at Rabobank International feel is likely to further stoke tensions with the Joe Biden administration in the US, which was unhappy with Saudi Arabia’s unwillingness to increase oil output last year to help cool inflation.

“The Opec+ production cuts come on top of the 500,000 bpd reduction announced by Russia in early March, and highlight how susceptible the economic outlook remains to (deliberate) supply shocks. The US response until now has been to release oil from its Strategic Petroleum Reserve (SPR), which has reduced stocks to its lowest level since the early 1980s,” wrote Benjamin Picton, senior macro strategist at Rabobank International in a recent note.

Brent crude prices had dropped to around $72 a barrel in mid-March as the banking crisis in the US and Europe triggered fears of a contagion and economic slowdown globally. Since then, prices have risen around 18 per cent to just under $85 a barrel now.

“The cut in production is consistent with Opec’s new doctrine to act pre-emptively because they can without significant market share loss,” according to analysts at Goldman Sachs. They lowered their Opec+ production forecast by 1.1 million bpd till the end of December, and raise Brent price forecasts by $5 a barrel to $95 a barrel for December.

Hari of Vanda Insights, too, expects oil prices to climb as the year progresses, though her forecast is based on a host of factors.

“The rise in oil prices from here on will be very scenario-driven,” she said. For instance, if Chinese demand rebounds by 700,000 barrels per day or more year-on-year for 2023 and, say, consumption is mostly flat Europe and the US and Opec+ maintains its cuts, crude could move towards $90, she said. “But I think if/when that happens, Opec+ will be under pressure to open the spigots a bit,” she added.