Oil Prices Surge Nearly 13% in Q1 Driven by OPEC+ Cuts and Supply Fears

Oil prices experienced a robust surge in the first quarter of the year, propelled by significant output reductions by OPEC+ and mounting concerns over potential disruptions in the global supply chain.

Brent crude, serving as the benchmark for a substantial portion of the world’s oil, surged by approximately 13% in the initial three months of 2023. Simultaneously, West Texas Intermediate, the primary indicator for US crude, witnessed a notable gain of about 16% within the same period.

The ongoing conflict between Russia and Ukraine has reignited concerns over geopolitical risks, particularly with Kyiv intensifying attacks on Russian energy infrastructure. Fitch’s BMI research unit noted that these risk premiums, combined with ongoing supply uncertainties in the Middle East and the concerted cutbacks by OPEC+, have bolstered significant price hikes.

This week alone, oil prices recorded a gain of approximately 2.6%, extending the upward trajectory observed until Thursday’s close, with US markets closed due to the Good Friday holiday.

Although the US Energy Information Administration reported a 3.2 million-barrel expansion in US crude inventories for the week ending March 22, the increase was notably smaller than the 9.3-million-barrel stock build projected by the American Petroleum Institute earlier. Moreover, while total petroleum stocks exhibited growth by 1.3 million barrels, distillate inventories saw a decline by 1.2 million barrels, indicating mixed signals for demand amidst global economic instability.

Looking forward, the market’s supply-demand equilibrium will hinge significantly on decisions made by the OPEC+ alliance. With the group recently extending voluntary cuts of 2.2 million barrels per day into the second quarter, their upcoming meeting on April 3 holds considerable weight in assessing oil market conditions, with a full ministerial gathering scheduled for Vienna in June.

Despite expectations for a gradual supply increase over the second half of the year, BMI highlights the uncertainty surrounding the pace of unwinding the deal as a crucial variable for next year’s forecast.

The impact of the Russia-Ukraine conflict on oil supply remains a critical concern. Ukraine’s drone strikes on Russian refineries have led to significant disruptions in Moscow’s processing capacity, with estimates suggesting that between 600,000 to 900,000 barrels per day of refining capacity could remain offline for an extended period.

Additionally, money managers have shown a bullish sentiment in the market, consistently increasing their investment in oil futures contracts. Ole Hansen, head of commodity strategy at Saxo Bank, noted a significant uptick in net buying of contracts, resulting in a five-month high net long position of 509 million barrels.

As uncertainties persist in geopolitical hotspots and supply dynamics evolve, the oil market continues to navigate a complex landscape, with implications for global economic stability and energy security.