Timing of OPEC+ Production Cut Is a Surprise, but Not the Shift to a Tightening Stance

OPEC+ announced a production cut of more than 1.6 million barrels per day during the first weekend in April, sending oil prices up about $4-$5 a barrel (about 5%). The surprise, in our view, was the timing of the cut—just ahead of what was expected to be a routine OPEC meeting, instead of in the usual postmeeting announcement.

The shift toward a tightening stance by OPEC+ makes sense, following the increase in global crude inventories we’ve seen over the past few months, plus the recession fears that have likely increased following the struggles of the U.S. and European banking sectors. Our fair value estimates and moat ratings for our U.S. oil and gas coverage are unchanged following the announcement. We’d flag SLB SLB, TC Energy TRP, and Equitrans ETRN as undervalued in this environment.

This timing suggests that OPEC+ was more concerned about recent oil market data points and wanted to preemptively move ahead of their worsening further. We believe one key data point was probably the Biden administration’s recent comments that it could take “years” to refill the U.S. Strategic Petroleum Reserve, suggesting that the United States wouldn’t be buying oil as aggressively as initially thought and thus supporting oil prices. A second key data point is the loss of 470,000 barrels per day of Iraqi oil exports following Iraq’s recent win in an arbitration case against Turkey over control of crude oil exports in the region, halting operations and introducing uncertainty about the timing of any restart in exports.