imaginima
By Kelly Weber, CFA
OPEC+ surprised the market last week with a substantial production cut, reducing downside tail risk to prices and providing a constructive environment for energy credit.
Last week, OPEC+ surprised the market with a 2 million barrels per day (bpd) production cut beginning with its November output. The group is looking to stem price declines, which had been accelerating as markets became increasingly concerned about the effect that a global recession would have on demand. Crude prices rallied last week, with WTI up 16% to $92/bbl.
With many countries already underproducing their quotas, the actual output cut is estimated to be 1.1 million bpd. This is still a substantial reduction, largely removes excess supply from the market and will likely pause the rebuild of global inventories, which remain low. It will also add incremental spare capacity to the market that OPEC+ could use to provide a relief valve in the case of a large price spike. The group showed a willingness to use this flexibility when it added incremental production at its June meeting after WTI traded above $110/bbl.
As we look at the supply landscape into the end of the year, the market will be focused on Russian production with the European Union import ban and G7 price cap scheduled to take effect on December 5. The price cap is designed to limit the price captured by Russia while keeping barrels on the market. Russia has threatened to retaliate with a production cut, which could put additional upward pressure on prices. We note that Russia has an economic inventive to keep barrels on the market and has already been selling crude at heavily discounted prices to countries including China, India and Turkey; however, we cannot rule out the possibility that the cap could create some disruption in the market or that Russia weaponizes the crude market similarly to its actions in the European natural gas market.
The demand outlook continues to be uncertain, with rate increases by central banks and the evolution of China’s zero-COVID policy; however, last week’s move suggests that OPEC+ will be proactive if crude prices decline.
In our view, last week’s meeting reduces the downside tail risk to crude prices. For investment-grade producers, this sets the stage for stable credit profiles amid a more challenging fundamental environment for other sectors. We expect producers to remain disciplined on production growth and capital spending with a focus on free cash flow generation. While most free cash flow will go to shareholders as balance sheets have largely been restored, we expect some modest incremental debt reduction as companies protect their credit profiles.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. The firm, its employees and advisory accounts may hold positions of any companies discussed. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.
© 2009-2022 Neuberger Berman Group LLC. All rights reserved.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Be the first to comment