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OPEC is fighting a difficult battle on the crude oil price front. The cartel of leading oil producing countries stepped up production cuts in May, but was unable to arrest the fall in crude oil prices. Brent crude oil futures declined from $84 at the beginning of April to $74 a barrel now. That's in spite of OPEC reducing oil production by 244,000 barrels per day (b/d) in April and increasing output cuts to 464,000 b/d in May.
The fall in crude oil prices despite output cuts by the dominant supplier group highlights heightened demand headwinds, especially in Europe. Concurrently, OPEC's production cuts have been undermined by higher supplies from other countries in Africa and the Americas. The share of OPEC crude oil in total global production decreased by 0.2 percentage points to 28 percent in May from the previous month.
To drive crude oil prices higher, Saudi Arabia, a member of OPEC, voluntarily agreed to reduce crude oil supplies by an additional 1 million barrels per day (mb/d) in July. This is expected to tighten the crude oil market balance in the second half of 2023 and support oil prices.
Yet, supply cuts did not drive major upgrades in crude oil price forecasts. As COVID-led demand for goods eases, economic activity is increasingly driven by the less energy intensive services sector. The sharp rise in interest rates and caution among global enterprises are also clouding corporate investments. “The macro outlook continues to be a more important driver for prices than fundamentals at the moment,” experts at ING Bank said in a note.
Moreover, producers outside OPEC are steadily stepping up crude oil production. They are optimising production from existing capacities, and tapping and scaling up low cost production sites. Production in the economically advanced OECD countries is set to rise by 1.47 mb/d or 4.8 percent in 2023.
Encouraged by favourable returns, producers are increasing exploration activities. This is reflected in higher demand for floating rigs. “With increasing demand and (rig) rates, we are approaching the tipping point for new builds and reactivations,” Leslie Cook, principal analyst for Wood Mackenzie said in an update. While exploration activities can take a long time to yield results, the increasing production in non-OPEC countries can reduce the oil cartel’s influence over crude oil prices.
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