OPEC+ took the industry by surprise when it decided to roll over its quota.
That’s according to Ann-Louise Hittle, the vice president of macro oils at Wood Mackenzie, who said the market was expecting a “substantial” increase in production because a tightening in the supply and demand balance is already evident.
“Clearly OPEC+ has decided to take a cautious approach to demand recovery,” Hittle said.
“However, waiting for a solid sign of strong stock draws means prices will have already increased from the present level by the time that sign emerges,” Hittle added.
“Stocks are a lagging indicator and already the market can see solid signals of demand strength – the vaccination program in the U.S., the world’s largest consumer, is ramping up, with the Biden administration promising enough for every adult by end-May. This should help spur a recovery,” Hittle continued.
Even before OPEC+ agreed to roll over its current production cuts, with the exception of Russia and Kazakhstan who will be allowed small increases, Wood Mackenzie was forecasting global stock draws for the second to fourth quarters this year. If OPEC+ does not increase output in April, except the small amounts for Russia and Kazakhstan, the stock draw will be significantly more than one million barrels per day next month, as the summer demand season looms, Wood Mackenzie outlined, adding that it expects oil prices to rise toward $70-$75 per barrel during April.
“The risk is these higher prices will dampen the tentative global recovery,” Hittle said.
“But the Saudi Energy Minister, Prince Abdulaziz, is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production,” Hittle added.
Rystad Energy’s head of oil markets, Bjornar Tonhaugen, outlined that the biggest winner of an OPEC+ rollover is the U.S.
“With such price levels … the U.S. can comfortably increase production, even from costly break-even projects,” he said in a statement sent to Rigzone.
“Russia stated that it was concerned about the U.S. increasing its production and for good reason … [the] outcome is a great explanation why the U.S. is not considering joining the alliance … OPEC+ once again is holding the market high, by maintaining its painful own cuts, and competitors are benefiting,” Tonhaugen added.
“Nevertheless, OPEC+ members should not be too concerned over market share, as demand will rise from summer onwards and the alliance is the only source that can offer so much product to match the increased need,” Tonhaugen went on to say.
Andy Brogan, EY’s global oil and gas leader, said OPEC has done a remarkable job over the last year managing supply against a demand disruption that no one had ever contemplated, let alone foresaw or prepared for.
“Prices are essentially what they were before the Covid-19 crisis, the voluntary cuts by Saudi Arabia have made all the difference and other OPEC+ members have every reason to be grateful for the Kingdom’s ability and willingness to take on the leadership role that they have,” Brogan said.
“It appears that the longer view has prevailed which means that there’s plenty of upside if demand comes back to normal sooner and North American supplies continue to be affected by capex cuts,” he added.
At OPEC+’s latest meeting, which took place via videoconference, the group approved a continuation of the production levels of March for the month of April, excluding Russia and Kazakhstan, who will be allowed to increase production by 130 and 20 thousand barrels per day, respectively, “due to continued seasonal consumption patterns”. Saudi Arabia also decided to extend its additional voluntary cut of one million barrels per day for the month of April.
To contact the author, email andreas.exarheas@rigzone.com
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