OPEC+ Defends Oil Prices With New Production Cut While Consolidating Influence Around the Saudis

On June 4, OPEC+ announced about 1.4 million barrels per day of production cuts. Saudi Arabia would cut 1 million barrels per day production in July 2023 for one month, though it can be extended, which we consider a realistic cut, while the remaining 400,000 net barrels are aligning quotas to actual production levels, and we’d consider paper barrels. The previously announced 1.6 million barrels per day cut (or about 600,000-700,000 barrels per day allowing for quota underproduction) by OPEC in April has now been extended through the end of 2024 from through the end of 2023. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag Equitrans ETRN and ExxonMobil as undervalued.

With the earlier cuts only beginning in May and having a limited impact so far, we see the latest announcement more about defending oil prices with the threat of further production cut extensions. Brent prices have fallen about 10% since the start of April to about $76 a barrel currently. At the time, we felt, as OPEC+ likely did, that the cuts would be enough to support higher oil prices in the near term with a potential spike to $100 a barrel remaining a possibility in the second half of the year.

Thus, the decline in price has likely frustrated the Saudis. Comments from Saudi Arabia ahead of the meeting have been unusually pointed and focused heavily on prices and oil short sellers. This indicates, in our view, that the country is under growing pressure to keep prices high (above $80 a barrel) to ensure enough revenue to fund planned social spending over the next few years. Essentially, the cut and extension threats are widening the gap further in what we already saw as an undersupplied oil market in the second half of 2023 from our April observations. OPEC+ is also somewhat emboldened to cut production knowing that U.S. producers are not likely to steal share.