The oil price extended its gains after yesterday’s surprise cut in production by members of OPEC+ and analysts think there is more to come with one seeing the increase in prices as a bigger medium term risk for credit that the banking crisis.
Brent crude advanced 0.9% to US$85.69/barrel while West Texas Intermediate prices climbed a further 1% to US$81.18/barrel.
Goldman Sachs (NYSE:GS) thinks the cuts by OPEC+ could result in a significantly larger deficit in the market, driving a rally in prices to US$100 per barrel by April 2024.
It sees "elevated OPEC pricing power - the ability to raise prices without significantly hurting its demand - as the key economic driver", and estimates that the production cut will raise OPEC+ revenues as the boost to prices more than offsets the drop in volumes.
The US investment bank reiterated its view that the market will return to sustained deficits from June onward given rapid emerging market growth, falling Russia supply, and sluggish US supply.
The broker lifted its price forecast for Brent for December 2023 by US$5 to US$95 a barrel on Monday.
Analysts at Barclays also see a US$5 upside to its US$92 per barrel price target, while Jefferies noted Brent prices could still end the year at US$96 per barrel.
At Societe Generale analyst believe the production cuts pose a bigger medium-term challenge for credit than the banking crisis.
The first problem SocGen highlights is that Opec+’s targeting of US$90 a barrel is a very big ask effectively a return to levels last seen in the first months after Russia’s invasion of Ukraine.
SocGen feels this creates two challenges for credit, likely higher energy prices will increase pressure on the central banks to hike interest rates and second, higher energy prices are set to weigh on corporate margins and results.
Analysts at the broker continued: "More broadly, we continue to believe that the next real credit crisis will be a non-financial rather than a financial one. For this reason, we think the OPEC agreement is likely to prove more of a long-term concern for the credit markets than the banking crisis."