No Reason For Big Adjustments Amid Strong Demand, Price Environment

Ongoing demand growth for crude oil is largely concentrated now among the world’s developing nations amid energy transition policy focus by governments of the western world. But that’s enough to maintain robust demand and price environments globally, especially when China and India, the world’s second and third-largest economies, continue to be included on the roster of developing nations.

India has become one of the major buyers of Russian crude as Europe and the U.S. have ratcheted-up ever-stronger sanctions on the aggressor nation in retaliation for its ongoing war on Ukraine. But there will be somewhat less of such crude on the market as of March, after the Putin government said it would cut overall output by 5%, or about 500,000 barrels of oil per day (bopd).

OPEC+ Has Little Reason to Adjust

The Russian announcement came days after a technical committee of the OPEC+ cartel, of which Russia is a key member, had held its regular digital meeting. Representatives of some of the OPEC+ nations told Reuters that the Russians had not provided the group with any advance notice of the planned cut. But Bloomberg quoted delegates who preferred to not be identified as saying the cartel does not currently plan to implement any changes in response to the Russian move.

Amrita Sen, co-founder of the consultancy Energy Aspects, told Bloomberg TV that she expects OPEC+ to keep its production flat throughout 2023. “Having spoken to quite a few officials in Riyadh, the motto was very much to stay put this year — no changes to OPEC+ policy, regardless of the volatility we see in prices.”

A strong consensus seems to have formed among analyst projections of strong demand and price environments persisting for crude throughout the year, providing little reason for the cartel to implement changes. Russia’s cut in crude production only seems to reinforce that notion.

Goldman Sachs, for example, cut its 2023 average crude price forecast by $6 per barrel last week, but that cut lowered the forecast to a still-robust $92 per barrel, well above the reported OPEC+ target Brent price of $80/bbl. J.P. Morgan takes a similar outlook, setting its average Brent price at $90 for the year. After speaking with representatives of five OPEC+ member nations, Reuters said that three of them predicted the crude price would rise above $100/bbl for at least part of the year.

U.S. Shale Will Also Stand Firm

Indeed, such a spike at some point in the year does seem likely, especially with this Russian cut that would essentially offset projections for production growth by the U.S. shale industry for the year. The U.S. Energy Information Administration (EIA) recently predicted that overall domestic crude production would average 12.4 million bopd, an increase of 500,000 bopd over 2022.

It has become apparent, 70 days into the year, that America’s shale drillers are choosing to hold their drilling activities in check despite the strong prices. The Enverus daily count of active drilling rigs closed on February 10 at 830 active rigs, a drop of 26 from January 10.

As I said in my annual predictions story for 2023, U.S. oil and gas producers have landed themselves into a very sweet spot in the development of these major shale plays, and will be more than happy to wallow in it like a herd of well-fed bison for another year in 2023. The spending and capital discipline that has been basically forced upon them by investors in recent years has led to strong cash flows, high profitability and a great level of predictability in their business plans, all of which make the lives of management teams much easier and less stressful.

So, don’t expect any big changes in that dynamic, absent another pandemic or other major global events upsetting the status quo.

The Bottom Line

Despite the war raging in Ukraine and all the sanctions, price caps, export bans and other machinations impacting oil markets, the global industry overall finds itself in a remarkably stable state of affairs and thus has little reason to implement major strategic shifts. That could all change in a relative heartbeat, as everyone found out the hard way in 2020, but absent major unforeseen events, 2023 shapes up as a year in which all industry parties strive to maintain a comfortable status quo.