‘Critically low’ inventory levels
The bad news is that even if OPEC+ acts, the response may do little to cool off red-hot energy markets.
Goldman Sachs said that if OPEC+ brings forward its plan to raise output in April (translating to an extra 200,000 barrels per day of supply through the end of the year), the bank’s modeling points to just a $3 dent to oil prices. And the hit to prices would be “even less,” Goldman Sachs said, if Saudi Arabia decides to unilaterally boost production by half a million barrels per day for three months.
“Such an OPEC+ move would not change our bullish view,” the Wall Street bank said in the report.
Goldman Sachs cited “critically low inventory levels” across a range of petroleum products and regions as well as “critically low” spare capacity to ramp up supply.
Others don’t think OPEC will respond to the price spike — even though at some point it could start to erode demand.
“We do not expect the producer group to provide immediate comfort for consuming countries,” Helima Croft, head of global commodity strategy at RBC Capital Markets, wrote in a note to clients on Monday.
That’s even though, as Croft put it, oil prices are “wading deeper into President Biden’s political danger zone.”
OPEC’s fastest recovery since 1974
Yet OPEC nations are likely in no rush to stop the windfall to their battered budgets.
“For countries that continue to suffer from profound political and security challenges, such as Iraq, this price surge is a welcome development that may push demand destruction concerns to the back burner,” Croft wrote.
The RBC strategist noted that higher commodity prices have “swelled” Russia’s foreign exchange reserves, potentially giving Moscow further room to withstand Western sanctions.
Croft said that could provoke a response from Saudi Arabia, the leader of OPEC.
“We do believe the Kingdom’s calculations could change in the event that a conventional war breaks out on European soil and crude prices soar past the $100/bbl mark,” Croft wrote.