The surprise oil output cuts announced on Sunday by OPEC
plus members illustrate their greater power over the market, given limited
supply growth by other producers such as US shale firms and still-growing
demand despite the energy transition.
Oil has jumped to US$85 a barrel since members of the
Organization of the Petroleum Exporting Countries and allies including
Russia announced production cuts of about 1.16 million barrels per
day (bpd), adding to curbs already in place.
While
OPEC or OPEC Plus decisions to cut output in the past have drawn warnings that
higher prices and lower OPEC Plus output would encourage US shale producers to
pump more, officials have not voiced such concerns recently.
Goldman Sachs said it sees elevated OPEC pricing power - the
ability to raise prices without significantly hurting its demand - as the key
economic driver, and estimates the production cut will raise OPEC Plus revenues.
"One
thing is for certain, OPEC is in control and driving price and US shale is no
longer viewed as the marginal producer," said James Mick, senior portfolio
manager at Tortoise Capital Advisors.
"OPEC
wants and needs a higher price, and they are back in the driver's seat to
obtaining their wishes."
US shale oil drillers over the last two decades helped to
turn the United States into the world's largest producer. But the gains in
output are slowing and executives warn of future declines.
US oil
and gas activity stalled in the first quarter, according to a survey, with
some respondents citing higher costs and interest rates. OPEC has this year
been lowering its US shale oil output forecast, having also done so in 2022.
An OPEC Plus source, asked if OPEC Plus is in the driver's
seat when it comes to the oil market now said, "We are not in the
passenger seat".
OPEC+ does not have a target for oil prices. The Saudi
Arabian energy ministry said the voluntary output cut from the kingdom, the
kingpin of OPEC Plus, was a precautionary measure aimed at supporting oil
market stability.
OPEC sources have cited a lack of sufficient investment
to increase supply as likely to support prices this year.
Investment
is rebounding after taking a hit during the pandemic. According to the
International Energy Forum (IEF), oil and gas upstream capital spending rose
39% in 2022 to US$499 billion, the highest level since 2014 and the largest ever
year-on-year gain.
But,
the IEF said, annual upstream investment will need to increase to US$640
billion in 2030 to ensure adequate supplies.
OPEC is pumping almost 1 million bpd less than its current
output target, according to its own figures and other estimates, with notable
shortfalls in Nigeria and Angola from which Western oil companies have moved
away in recent years.
While
non-OPEC producers are still expected to pump more in 2023, the forecast of a
supply increase of 1.44 million bpd falls short of expected world demand growth
of 2.32 million bpd, according to OPEC forecasts.
The International Energy Agency, which represents 31
countries including top consumer the United States, also expects demand growth
to exceed supply growth, although to a smaller extent than OPEC.
In OPEC's view, investment cuts after oil prices collapsed
in 2015-2016 due to oversupply; along with a growing focus by investors on
economic, social and governance (ESG) issues - such as tackling climate change
- have led to a shortfall in the spending needed to meet demand.
OPEC
Secretary General Haitham Al Ghais, in comments to Reuters last year,
attributed slower shale growth to factors including an increase in investor
caution and the impact of ESG issues on the industry.
"The scope for supply growth outside of OPEC+ members
is limited and in combination with tighter conditions expected later this year
even before this cut was announced, there is now greater upside risk to
prices," said Callum Macpherson, head of commodities at Investec.