A positive change in narrative for oil prices. Oil languished for much of the first quarter, with Brent and WTI briefly dipping below USD70 and USD60 per barrel respectively earlier in March, driven by turmoil in the US and Europe banking sectors and corresponding worries of recession and falling demand for energy. This risk-off sentiment, however, did not last long; with financial system risks now seemingly ringfenced by regulators, investors wasted no time in finding a silver lining in the form of a moderating interest rate outlook. Futures markets have now shaved terminal rates by some 75-100 bps and are now pricing 70 bps of cuts (from peak) by the end of the year, and a cumulative 200 bps of cuts by end-2024. This alleviated some of the demand concerns around energy and lifted oil prices.

OPEC+ to cut production by 1.15mmpd starting May 2023. This turnaround in prices was further supported when OPEC+ announced a surprise production cut of 1.15mmpd on 3 April, sending WTI and Brent prices up 6% on the same day, to c.USD80/bbl and c.USD85/bbl respectively. These additional cuts came on the back of a headline reduction of 2.0mmbpd last October, bringing the total volume of OPEC+ cuts since last year to 3.15mmbpd, or roughly 3.1% of global demand according to OPEC+ estimates.

Source: Preqin, DBS

Spurred by stagnant US production and Russia production cuts. The cuts will be led by Saudi Arabia (0.5mmbpd), with UAE (144kbpd), Kuwait (128kbpd), Iraq (211kbpd), Algeria (48kbpd), and non-OPEC partners Kazakhstan (78kbpd) and Oman (40kbpd) also participating. We believe the decision to implement the latest round of cuts was spurred by Russia’s announcement that they would cut production by 0.5mmbpd earlier in March, as well as muted growth in US oil production over the past 6 months as that will allow OPEC+ to shore up oil prices without conceding market share.

Oil demand to remain supported by rebounding air travel and China’s reopening. In addition to supply-side factors, oil prices will also be supported on the demand side from growing international travel and China’s reopening. The International Energy Agency estimates that rebounding jet fuel use and a resurgent China will see global oil demand ramp up by a total 3.2mmbpd for 2023. China alone is set to contribute 0.8mmbpd of that increase. The easing of travel restrictions is set to boost China’s demand for oil by c.0.4 mmbpd while improving subway mobility on the domestic front (due to the abolishment of the health code and centralised quarantine practices) will boost consumption by another 0.4mmbpd. China has historically been the world’s second largest consumer of crude oil, accounting for c.15% of global demand, and the impact of its reopening should not be underestimated.

Source: Bloomberg, DBS

Source: US Energy Information Administration,
Bloomberg, DBS

Outlook for oil remains positive; reiterate constructive stance on European oil majors. While oil prices have experienced a significant run-up, we are cognizant that this price rally is still in its nascency. Furthermore, there are other factors such as inflation and interest rates that could alter the outlook of oil prices. However, if the latest round of supply cuts is fully and successfully implemented, they should have a bigger and more sustainable impact on oil prices compared to the headline 2.0mmbpd cuts announced last October. Having said that, DBS is revising up our forecasts for the Brent crude oil price average for 2023/24 by USD5/bbl to USD85-90/bbl and USD82-87/bbl, respectively. While such prices are not as high as what we have seen in 2022, they remain meaningfully above pre-Covid levels and will continue to benefit companies in the crude oil and energy sector. We maintain our constructive stance on European oil majors due to their attractive dividend yields and diversification of operations along the entire energy value chain. Investors can also express the upside potential of energy markets in their portfolios through sectoral ETFs and managed funds.