Digging Deeper Into the Surprise Production Cut by OPEC+

After taking a deeper look into the market dynamics around the weekend production cut of 1.6 million barrels per day by OPEC+, we have some additional takeaways. The surprise, in our view, remains the timing of the cut—just ahead of what was expected to be a routine OPEC meeting, instead of in the usual postmeeting announcement, which is a sharp break in tradition. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag SLB SLB, TC Energy TRP, and Equitrans ETRN as undervalued in this environment.

We think the biggest key takeaway is now with the cut, we are facing a scenario where oil demand is materially outstripping supply in the second half of 2023, creating an actual supply deficit, versus a more modest supply cushion. Before the cut, we expected the market was poised to tighten, particularly in the latter half of 2023, as Chinese oil demand surged. For example, the International Energy Agency, or IEA, is targeting 960,000 barrels per day of oil demand growth from China, by far the largest contributor to global oil demand growth. This increase in demand would have likely limited further crude oil inventory supply builds.

Now with the cut, we are potentially seeing a wider gap between supply and demand, providing a substantial boost to oil prices. We see a much higher probability of oil now reaching $100 a barrel in 2023. This is even the case where OPEC+ was already producing well below its quota limits before this cut (about 2 million barrels per day), suggesting that the actual production cuts are more in the range of 600,000-700,000 barrels per day.