(Bloomberg) -- It’s starting to look like OPEC+ was right again.

Saudi Arabia and its partners provoked a backlash from the White House and beyond earlier this month when they shocked global oil markets with new output reductions. But with Brent crude sinking below $80 a barrel Wednesday — wiping out the price gains since the announcement — the group’s contention that the cuts were needed to prevent an oversupply is gaining justification. 

“There is no doubt in my mind that the reasoning behind the early April announcement about cuts in May was appropriate,” said Ed Morse, head of commodities research at Citigroup Inc. “Those who were predicting over $100 oil did not understand how weak markets were looking.”

It’s reminiscent of the previous round of OPEC+ cutbacks in October — a decision that initially drew condemnation but came to appear prescient as the demand weakened and prices fell. 

Key OPEC+ members argue the fresh output curbs, which add up to more than 1 million barrels a day and take effect next month, were a necessary preemptive response to signs of weakening demand and excessive speculation. 

That position cut no ice with consumers as crude futures rocketed 8% to $86 a barrel in London on the day after the April 2 decision. US President Joe Biden’s administration said the move was ill-advised, a further indication of strained of ties with Saudi Crown Prince Mohammad bin Salman. The International Energy Agency warned it would worsen inflationary pain for consumers and endanger the global economy.

Yet in the three weeks since key members of the Organization of Petroleum Exporting Countries acted, oil markets have steadily deteriorated. Key indicators in the Asian crude market have weakened as the post-pandemic rebound in China, the biggest oil importer, fails to meet expectations. Deteriorating oil-refining profits over the last few weeks have left companies considering lower processing rates.  

Meanwhile, investor sentiment has been soured by lingering fears of recession in the US and as higher interest rates strengthen the dollar and dull the appeal of risk assets like commodities. 

Brent plunged below $78 a barrel Wednesday and the price difference between the first two futures contracts for the crude benchmark flipped into a bearish structure called contango for the first time since January. 

“Riyadh would likely insist that prices would be materially lower if they had not acted earlier this month,” said Helima Croft, head of commodity strategy at RBC Capital Markets LLC.

Tighter Markets

There’s still a chance that OPEC’s critics will be proved right in the latter part of the year.

World oil markets are expected to tighten when demand picks up in the second half, with OPEC’s own data pointing to an acute supply shortfall of more than 2 million barrels a day. Goldman Sachs Group Inc. and JPMorgan Chase & Co. see crude topping $90 a barrel by the end of 2023. 

“Looking at price action one could argue it was the correct move,” but it’s too early to reach a conclusion, said Helge Andre Martinsen, an analyst at DNB ASA bank in Oslo. “However, one must remember that it is in the second half of the year that the fundamental oil balance flips to deep under-supply.” 

The Paris-based IEA has stuck firmly to its criticism, with Executive Director Fatih Birol telling Bloomberg television on Wednesday that a “very fragile” economic recovery is in jeopardy. 

Considerable uncertainty is also posed by OPEC+ member Russia, which has vowed to slash production by 500,000 barrels a day in retaliation for sanctions over its war in Ukraine, yet has so far kept exports surprisingly stable. 

Another Bite

With the economy still in considerable flux due to stubborn inflation and rising interest rates, Saudi Arabia’s decision to cut has been justified just as it was last year. 

Back then, Biden said the kingdom would face “consequences” for spearheading a supply cutback of more than 2 million barrels a day. Riyadh was accused of aligning with Russia to push prices higher, helping Moscow finance the war in Ukraine. 

Yet in the ensuing months crude prices in London slumped from almost $100 a barrel to just over $76 and Saudi Energy Minister Prince Abdulaziz bin Salman said OPEC+ had adverted further “havoc” in the oil market. 

The question now is whether OPEC+ will argue that further cuts are needed when at its next meeting to review production.

“OPEC will wait until the June meeting to assess the situation,” said Gary Ross, a veteran oil consultant turned hedge fund manager at Black Gold Investors LLC. “By then, if prices don’t recover into the $80s for Brent — which they should — they may have to take another bite out of the apple.”

(Updates with analyst comment in third paragraph.)

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