Wall Street investment banks have raised their price forecasts for oil after OPEC+ moved to slash production by around 2 million barrels per day and squeeze supply in a snub to the Biden administration and its pleas to the cartel to pump more crude.
While the White House reacted negatively to OPEC’s decision by accusing the alliance of “aligning with Russia” and calling the move “shortsighted,” Saudi Energy Minister Abdulaziz bin Salman said it was about bringing stability to markets.
Some analysts have said OPEC’s cuts are meant stem the decline in oil prices, which hit about $120 per barrel during spring but have since slumped to roughly $90 per barrel on fears of an economic slowdown.
Wall Street, meanwhile, responded to news of the OPEC cuts by boosting their bets on the price of crude.
‘Dramatic’ Shift in Oil Balance
The oil team at Goldman Sachs raised their fourth-quarter 2022 Brent crude forecast by $10 to $110 per barrel.
“All the developments we have seen on the supply side at this point very much sets the stage for what we believe will be higher prices into the end of this year,” Damien Courvalin, head of energy research at Goldman, told Bloomberg TV.
Morgan Stanley analysts said in an Oct. 5 note that they expect Brent prices to hit $100 per barrel “quicker than we estimated before.” The team raised its first-quarter 2023 Brent price forecasts from $95 per barrel to $100, while keeping the outlook unchanged for the subsequent three quarters.
Analysts at ING said in a note on Oct. 6 that OPEC’s announcement “dramatically” shifts the oil balance for the rest of 2022 and all of next year, though this depends on whether the cartel’s members fully comply with the cuts.
While ING previously expected Brent to trade around the $90 per barrel mark through the first half of 2023 before advancing to $100 in the final quarter of 2023, they new expect a price point of $97 per barrel for all of 2023.
“The U.S. administration will not be thrilled with the action taken by OPEC+, particularly given that US mid-term elections are just around the corner,” the ING team wrote.
The White House directed a sharp rebuke toward OPEC+ after its members announced the cuts.
“The President is disappointed by the shortsighted decision by OPEC+ to cut production quotas while the global economy is dealing with the continued negative impact of [Russian President Vladimir] Putin’s invasion of Ukraine,” National Security Adviser Jake Sullivan and National Economic Council Director Brian Deese said in a statement following OPEC’s announcement.
Sullivan and Deese added that the Biden administration would release another 10 million barrels from the Strategic Petroleum Reserve (SPR) “to protect American consumers and promote energy security.”
But given that the SPR has been aggressively drawn down and is now at its lowest levels since 1984, ING analysts said there will be limits on how much more the Biden administration can release to hold down prices.
“Ultimately, OPEC+ can cut output for longer than the US can tap into its SPR,” they said.
‘Reliance on Foreign Oil’
President Joe Biden’s Republican critics said the administration’s reluctance to boost domestic crude production was amplifying the impact of OPEC’s move.
“OPEC is taking advantage of Pres. Biden’s reliance on foreign oil and slashing supply, which will drive up prices that Louisianians pay. It’s as simple and sad as that,” Sen. John Kennedy (R-La.) said in a statement on Twitter.
Oil industry insiders have blamed high gas prices in the United States on a misalignment between U.S. oil production and refining, along with the Biden administration’s inaction, bad policies, and political hostility toward fossil fuels.
Sen. John Cornyn (R-Texas) called OPEC’s decision humiliating for the Biden administration.
“As diplomatic humiliations go, it’s hard to top the decision by Saudi Arabia and its OPEC+ allies to cut oil production by two million barrels a day despite U.S. entreaties,” the Republican senator said in a statement on Twitter.
At a press conference following OPEC’s meeting, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman dismissed suggestions from reporters that the cuts could be seen as an act of “belligerence,” arguing instead that the decision is meant to provide stability to oil markets.
“We are here to stay as a moderating force, to bring about stability,” he told reporters.