Dennis Kissler, BOK Financial

Although oil prices fell slightly after OPEC+ announced it would keep its voluntary production cuts in place until midyear, the market’s initial reaction probably isn’t a harbinger of what’s to come as we move through the first half of the year.

OPEC+’s decision to extend its output cuts of 2.2 MMbbl/d into the second quarter was widely expected, especially given the concerns about global growth that have been circulating. However, within the announcement, Russia’s decision to cut its oil production and exports by an extra 471,000 bbl/d in the second quarter was a surprise to many—and, looking forward, it just might be one of the factors that supports higher oil prices.

What’s the ‘sweet spot’ for prices?

At the same time, it’s important to temper expectations. I’m not talking about a surge in prices; rather, the sweet spot for price equilibrium in OPEC+’s mind is likely between $85/bbl and $88/bbl for Brent, or approximately $78/bbl-$82/bbl for WTI. As of mid-March, those figures were around $82 for Brent and $79 for WTI, so even in the case of Brent, the price increase probably won’t be large.

Any prices we see below those ranges could easily push OPEC+’s production cuts into the end of the year—and that’s a possibility. The near-record production numbers coming out of the U.S.—at 13.3 MMbbl/d—has been a thorn in OPEC’s side. Without OPEC+’s continued production cuts, crude futures could easily be priced in at between $5/bbl and $8/bbl lower. 

Oil demand will be key

At the same time, oil demand has been better than most analysts expected, which could push prices higher. This increased demand is mostly led by higher global consumption of jet fuel, which is up 11.1% from the level of consumption a year ago. Also keep in mind that distillate/diesel inventories in the U.S. stand at 11 MMbbl below the five-year average. Any novice economist can tell you that tighter supplies with elevated demand will keep an upward bias to the pricing curve.

However, one wildcard is China. As I’ve written about before, much of the concern surrounding global oil demand has been stemming from China’s economic struggles post-COVID. Although China’s economy grew by 5.2% in 2023 and the government’s growth target for 2024 is a healthy 5%, the country still faces property market struggles, a declining population and insufficient demand.

Given that China is the largest manufacturing economy in the world, any growth struggles that they have tend to bring down oil demand. Still, as of this writing, the Hang Seng Stock Index has been making a nice recovery, and oil demand looks to be improving in most of Asia, especially India. If these improvements continue, that would also push oil prices higher.

Yet as we look forward through the next few months to midyear, another question is what will happen with U.S. interest rates. Previously, some experts anticipated that the Federal Reserve could cut rates as soon as March. However, now many experts do not expect the first rate cut to occur until June or July, with an anticipated total of three rate cuts in 2024. However, none of that is an absolute certainty: inflation remains on the Fed’s watch list, and the path toward the Fed’s goal of 2% inflation probably won’t be a straight line. If the Fed does end up having to keep rates higher for longer, that would be a headwind for crude prices and would most likely keep the U.S. dollar elevated against world currencies.

The bottom line

By keeping the voluntary production cuts for longer than what was originally expected, OPEC+ is sending a clear signal that oil prices need to be sustainable for both producers and consumers. However, again, it’s important to keep our expectations in check. While OPEC+ members will most likely be attentive to crude prices, they also have a checkered past in staying with compliance when prices get elevated.