OPEC+ ministers will meet next week to assess the global oil market, and at that time they will see plenty of evidence that their measures to cut production are working.

After experiencing a slump at the beginning of this year, crude oil prices are showing more and more signs of recovery as supply from Saudi Arabia and its allies dwindles, and demand is surprisingly elastic. Although current market sentiment is still less than early 2023, when traders generally claimed that oil prices would return to $100, Wall Street banks such as Morgan Stanley and trading giants such as Trafigura Group (Trafigura Group) expect oil prices to rise further.

Brent crude oil futures have risen about 11% this year and have consolidated their bottom above $85 in recent weeks. Although the rise in oil prices may weaken the results of the fight against inflation, which infuriates central banks and consumers, for the Saudi government and its partners, the rise in oil prices supports critical revenue.

OPEC+ will not have to adjust its policies next week; the pressure will be on until the June meeting

OPEC officials believe there is no need to consider any adjustments to the production policy at the April 3 meeting.

Deutsche Bank strategist Michael Hsueh said, “OPEC+ production cuts are effective. The global market is either already in a supply deficit or is about to turn into a deficit.” OPEC+ representatives also said that the past few weeks have proven that production cuts are having the expected effects.

After OPEC+ decided to extend the production reduction agreement until the end of June, the International Energy Agency (IEA), which provides advisory services to major economies, adjusted its forecast for the 2024 global market from oversupply to insufficient supply. The IEA said that global fuel consumption has exceeded expectations, and OPEC+ production cuts have offset significant new supply across the Americas. Earlier this month, executives were also optimistic at the S&P Global Energy Week (CERAWeek) conference in Houston.

Top trader Gunvor Group Ltd. (Gunvor Group Ltd.) predicts that oil prices will rise to 90 US dollars/barrel. Toko Group said that the focus of oil prices has turned to “upward risk.” The two companies expect global oil consumption to grow by about 1.5 million b/d this year, higher than historical trends, as strong US consumption offsets the effects of economic growth slowing in other regions.

On Wall Street, Morgan Stanley raised crude oil price expectations, and J.P. Morgan even warned that if Russia fulfills its new promise to shift production cuts from exports to production, the price of Brent crude oil could hit $100 per barrel. Standard Chartered estimates that global oil stocks declined rapidly at a rate of 1.7 million barrels per day last month.

Higher oil prices are likely to cause pain to consumers. According to the AAA Auto Club, the price of gasoline in the US could rise to $4/gallon, the highest level since summer 2022. This could complicate the work of the Federal Reserve, as it is trying to shift to a loose monetary policy. This may also cause trouble for Biden, as he is running for re-election with Trump, and high inflation will still leave a deep impression on consumers.

Helima Croft (Helima Croft), head of global commodity strategy at RBC Capital Markets LLC (RBC Capital Markets LLC), said “Biden will face a brutal summer,” and the conflict in Ukraine and the Middle East is jeopardizing energy supply.

But for the 22 OPEC+ member countries, rising oil prices will help fill the government's treasury. According to Fitch Ratings (Fitch Ratings), Saudi Arabia wants oil prices above $90 per barrel because Crown Prince Mohammed bin Salman (Mohammed bin Salman) is spending money on everything from futuristic cities to training top sports players. Meanwhile, Russia, led by Putin, needs funds to sustain operations against Ukraine.

Next week's OPEC+ Joint Ministerial Monitoring Committee meeting will not require policy adjustments, but will focus on member countries' compliance with production reduction commitments. Greg Brew (Greg Brew), an analyst at Eurasia Group (Eurasia Group) in New York, said: “OPEC is generally satisfied with the market conditions and the impact of production cuts, but it still has problems with fraud.”

Iraq and Kazakhstan have an imperfect record in complying with production reduction targets. In the first two months of the entry into force of the new agreement, they ignored their own targets, but promised further compensation for production cuts. Russia's situation is more complicated. Only recently did it deliver on its promise a year ago to cut crude oil production by about 500,000 barrels per day. Russia has promised similar production cuts by June while increasing exports. But Ukrainian drones launched an attack on the country's refining industry, further raising questions about its crude oil production and export trends.

Although the tasks for next week's OPEC+ review meeting seem simple, the coalition will face an even greater test at the next ministerial meeting, which is scheduled to take place on June 1 at the organization's Vienna headquarters. J.P. Morgan Chase and Standard Chartered believe OPEC+ will be able to ease restrictions and resume production in the second half of this year as oil demand picks up. However, IEA data suggests this will plunge the market back into oversupply.

Bob McNally (Bob McNally), founder of consulting firm Rapidan Energy Group and former White House consultant, said, “A lively ministerial meeting is about to be held in June.”

Saudi Energy Minister Prince Abdulaziz bin Salman has often urged other member states to be cautious in resuming interrupted supplies. However, neighboring UAE appears to be in a hurry to deploy new production capacity and has previously clashed with Saudi Arabia over production quotas.

But currently, “OPEC+ ministers are in a pretty comfortable position,” said Paul Horsnell (Paul Horsnell), head of commodity research at Standard Chartered Bank. “The balance in the oil market looks quite favorable, and the reduction in inventories in the first half of the year should lead to higher prices in the third quarter,” he said.

Biden faces a dual energy crisis

In addition to the oil producers laughing, the Biden administration will deal with the dual energy crisis brought about by the situation in Russia and the Middle East!

The US taxpayer-funded Ukrainian military is bombing key refineries in Russia using drones. The US government has urged Ukraine to stop attacking Russia's energy infrastructure, as this will only lead to tight global supply, push up energy prices and US inflation, and damage Biden's chances of re-election.

This isn't the only problem for Biden. US Vice President Harris said on a TV program last week that launching a large-scale attack on the Gazan city of Rafah would be a huge mistake, with more than 1 million Palestinians seeking refuge there.

Israeli Prime Minister Binyamin Netanyahu said on March 28, local time, that only if the Israeli military continues to exert strong military pressure can push for the release of the detained persons. He said that the Israeli army now controls the northern part of the Gaza Strip and Khan Younis, and “is preparing to attack Rafah.”

When asked if the US would act against Israel's actions in Rafah, Harris replied, “I don't rule out any possibility.” The truth is that America's concerns are not solely due to poor Palestinians; it is also worried that Israel's actions may trigger a wider conflict, which may cause crude oil prices to rise in a parabolic trajectory, thereby reigniting US inflation and continuing to have an impact on Biden's chances of re-election.

Rapidan Energy Group wrote in a recent report, “The 'Axis of Resistance' (Iran's agent in Lebanon, Syria, Iraq, and Yemen) is likely to step up its attacks due to Israel's ground attack in the Rafah region. Israel is likely to wait until the IDF consolidates control of the Rafah and Philadelphia Corridors before risking a major confrontation with Hezbollah. ”

The attack on Rafah may be the beginning of a series of domino effects, triggering multiple powder kegs in the region and putting the US military at risk once again. Last month, Rapidan raised the possibility of a major Israeli military attack on Lebanon from 30% to 40%. However, they “expect the tension between Israel and Hezbollah to remain manageable and that a diplomatic agreement will avoid a major conflict.”

Given the increasing uncertainty of the situation in the Middle East, Russia, and Ukraine, traders will soon turn their attention to Saudi Aramco's Abqaiq Plants (Abqaiq Plants), the world's largest refinery, and there are concerns that it may become a target for the Iran-backed Houthis.

All in all, the crude oil market has begun to pay attention to war risk premiums.