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Hello Power Up readers! The market has gotten a bit of a jolt from OPEC’s latest production cut, which was entirely unexpected and reflects worries about the global economic outlook but also, potentially, a sign that the cartel is less interested in the U.S. opinion of its deliberations. Prices are higher, though the markets will have to see how long that lasts. Here’s what’s going on – and just as a note, Power Up will be on hiatus on April 17.  

OPEC logo, y’know. Ramzi Boudina/File Photo

The Organization of the Petroleum Exporting Countries caught the markets napping over the weekend, electing to cut barrel-per-day production and try to lift the price of oil that had been sagging in recent months, and making it clear that the cartel is as much to be dealt with as lots of central banks. The move is roiling markets, Reuters reports here, sending oil up by several dollars a barrel, as the consensus among analysts was that while unexpected, it’s clear that OPEC is making a bet on a slowing economy. 

If so, higher oil prices would be likely to add to that, naturally, but at the same time, strategists said OPEC members were likely to have to deal somehow with their own budgetary issues that the $70-per-barrel level does not satisfy. And while the United States said the cuts were not advised, the decision to catch markets unaware shows the way in which Saudi Arabia’s relationship with the U.S. is evolving.  

“We have made several trips to the kingdom in recent months and one of the key messages has been that the United States is now seen as just one of several partners, and that the bilateral relationship with China is rising in importance,” wrote RBC Capital commodities strategist Helima Croft in commentary Sunday.  

Oil bounced a lot on Monday – whether it breaks out of its range is yet to be seen. 

With OPEC’s move to cut prices, the market surged back to more than $86 a barrel for Brent and $81 for U.S. crude, but by early Monday, the latter was already in danger of dipping back below $80 while Brent gave up some of its gains as well. The move by OPEC may well establish a higher range than before, but the uncertain outcome for demand – and that Russia is cutting from a higher production starting point anyway – could mean the market’s overall rally is a modest one.  

Both strategists at JP Morgan and Citigroup on Monday suggested that the OPEC gambit could only tighten supply by roughly 100,000 barrels per day, which isn’t all that much; JPMorgan notes that the effective cut by OPEC of 1.1 million bpd is more like 800,000 in an effective cut, while Russia’s output is going to be about 9.7 million bpd, they note. This will tighten supply but Citigroup notes that it may also motivate a bit more production from U.S. shale, which is more impaired than in the past, but cannot be dismissed entirely outright by OPEC either.  

Reuters columnist Clyde Russell put it bluntly, saying that within the decision to cut output is “the tacit admission that the demand side of the crude equation may not be as bullish as had been forecast by virtually every major energy body and the analyst community.”  

Natural gas output just keeps rising in the United States. 

U.S. natural gas prices last week dropped to levels not seen in two-and-a-half years, as Scott DiSavino reports here – briefly tacking below that $2 per million British thermal units (mmBtu) figure that’s a far cry from the $9-plus level briefly touched last year in the wake of Russia’s invasion of Ukraine. With futures down more than 50% this year, though, what’s surprising is that output is continuing to grow – which will continue to keep prices down.  

Gas in storage is up about 21% from this time of year, and producers are shifting drilling rigs away from gas – but associated gas from oil output is still rising, and the U.S. could well be sitting on a natural gas surplus by the time next winter’s heating season comes around. The Permian Basin of Texas and New Mexico has hit record monthly highs in oil output this year, according to U.S. Energy Information Administration (EIA) data.  

That will be a help for Europe, which was facing another year of rationing and stockpiling gas supply without the benefit of socking away supply from Russia that’s now cut off. Furthermore, the outlook has also recently improved in Australia, where regulators said on Monday that the country’s east coast gas market could have sufficient supply to meet its demand forecast in 2023 – a switch from previous forecasts that showed tighter markets. 

Russian vessels to India will be priced off the Dubai benchmark. 

Befitting its turn towards Asian markets, Russia’s largest producer Rosneft and Indian refining giant Indian Oil Corp are contracting crude trade with the Asia-focused Dubai price benchmark rather than price off Brent crude, as Nidhi Verma reports here.  

The decision by the two state-controlled companies to is part of a shift to the Asian benchmark. Dubai is still priced in dollars but is used more in trading of Middle Eastern crude grades sent on vessels to big Asian buyers. Russia has been reliant more on customers from China and especially India since its invasion of Ukraine, and since Europe stopped buying Russian oil for the most part.  

“This a question of life and death in real terms, in real time.”

US Energy Secretary Jennifer Granholm, on installing more solar panels in Puerto Rico to head off subsequent problems with power on the island

These Permian pump jacks look cool with the sun behind them. Loving County, Texas. REUTERS/Angus Mordant

Ovintiv is nearing a deal to acquire oil assets in Texas’s Permian Basin controlled by private equity firm EnCap Investments for about $4 billion, as David French and Shariq Khan report here. This represents a big bet on the Permian to boost its presence there, as it remains the most lucrative part of U.S. production assets. 

The assets are located in the Midland section of the Permian. While negotiations are still ongoing, a deal could come as early as this week. Ovintiv has been drawing down debt overall and stockpiling the cash; the company’s last big buy was Newfield Exploration, but that deal was looked at more critically.  

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