OPEC+ meeting day yesterday and it did not disappoint, as developments took the market by surprise.
Even though the market’s initial expectation was that OPEC+ would not dare increase its output as early as May, reports from the meeting show that a consensus to gradually increase production is actually the outcome.
The agreement will gradually bring back some of the alliance’s curtailed output, despite the oil demand recovery concerns that its own technical committee highlighted.
Saudi Arabia is also gradually bringing back its voluntary cuts and the combo will now bring calculators back to the table, as traders – who were taken by surprise – now have to calculate balances and rework their pricing.
So far, OPEC+ has agreed to gradually increase its target production by 350,000 bpd in May and June, and 400,0000 bpd in July. In addition, Saudi Arabia will bring back 250,000 bpd in May, 350,000 bpd in June, and 400,000 bpd in July of its voluntary cuts.
The most main and immediate takeaway is that a total 600,000 bpd of crude oil is coming back in May.
A 600,000 bpd addition for May should be well received as a “hold steady” option. Though of course raising the target by 600,000 bpd means real production will be a bit higher than this guidance, and the same goes for the months that follow.
The OPEC+ decision today deepens the crude draws for May and June, and we now expect an average of 750,000 bpd drawn in these months.
For July, the outcome is a bit more bearish than expected, but we still foresee a health 800,000 bpd draw for the month.
The decision by OPEC+ shows that patience was exhausted among many producers, who could not accept that some countries – and mainly Russia – was allowed to constantly hike their production while others kept it flat.
The outcome of the meeting is also revealing that even though the group’s own experts warned about the lagging oil demand recovery and the market risks that the extended lockdowns are bringing, decision-makers have another vision.
Market politics and financials prevail in such meetings and theory is not always met with what would be considered a reasonable action to address the current market risk.
Taking into account the gradual production increase, May so far looks quite balanced, as a result of heavy maintenance across several countries and the delay of the Luanda refinery expansion in Angola.
By mid-summer, we expect the vaccine hiccups to be a distant memory, and for many developing countries to be nearing 50% vaccination rates.
Thus, we still expect end-user demand to pick up over the summer as economies open, and in line with seasonal demand.
The summer demand surge, combined with OPEC+’s new plan, could push implied stocks down to an almost 3 million bpd deficit in August.
The announcement of more supply returning to the market is understandably puncturing some of the pre-meeting upward excitement in oil benchmarks.
The output rise is not likely to be detrimental, especially for June and July as demand will likely also rise, and that is reflected in the market reaction, which is not a panic one to slash price levels.
The Brent price in May could also get an extra boost due to North Sea maintenance although this is already mostly priced in.
The bottom line is that the oil market is getting another nearly 2 million barrels per day over the next three months. We always knew these barrels would return eventually, the question now is if they are coming too early versus what the market can digest.
The decision to hike output, although linked to expectations for a rise in oil demand during the summer, likely came as a result of some producers feeling that the relation of who produces and how much was becoming a bit… unbalanced.
Comment by Rystad Energy’s oil markets analyst Louise Dickson