Big OPEC+ supply cut needed to keep oil up

Oil prices have gone into sentinel mode ahead of today’s highly anticipated OPEC+ decision which may herald a sizable production cut.

Oil’s recent gains have been predicated on the notion that the alliance would tighten the taps, perhaps by as much as 2 million bpd, in order to shore up prices. Such a U-turn would also be a welcome relief for OPEC+ members who have struggled to reach their respective quotas as part of the prior campaign to restore supplies that were shuttered by the pandemic.

OPEC+ has to convincingly demonstrate its desire to restore prices to market fundamentals in order to offer meaningful support for oil benchmarks, amid the wave of demand-destroying policy tightening by central banks around the world.

A 2 million bpd cut, depending on how the headline figure filters down to individual member’s actual production levels, should go a long way in sustaining Brent around the $90/bbl handle. Anything less than 1 million bpd is set to greatly disappoint markets, likely prompting the unwinding of oil’s recent gains. The US is apparently pushing the cartel not to proceed with potential deep output cuts arguing that economic fundamentals do not support such a measure.

In order for oil to continue marching higher, today’s OPEC+ announcement has to materially tighten the global supply-demand equation. The group also may have to signal its willingness for additional cuts in the future, in order to generate more pushback against the downward pressures on oil prices stemming from looming global recession risks.