Oil rises on OPEC+ meeting expectations -Rystad Energy comments

Oil prices rose on Thursday as the market expects the OPEC+ alliance to maintain current production levels and not bring back any of its curtailed output due to the lagging oil demand recovery.

Here is Rystad Energy’s daily market comment from our Oil Markets Analyst Louise Dickson:

It’s OPEC+ meeting day and it’s no surprise the market is up on expectations that the alliance will not increase production in May, as a result of the hurt oil demand recovery that its own experts highlighted yesterday.

A potential rollover of the current cuts into May will help global balances, as refinery maintenance season and a lag in oil products consumption due to lockdowns weigh on prices.

The technical committee yesterday warned observers that the oil demand is still fragile and that the prolonged lockdowns are affecting the market more than OPEC initially thought, the reason that the group also lowered its demand growth expectations.

Traders wonder, how can OPEC possibly ignore the signs of its own research team and increase production at a time of such uncertainty?

In reality research and actual market decisions don’t always go together, as fiscal budgets depend on income from the oil market for many OPEC countries. The cuts have helped prices but a lot of producers have been hurt by the production curbs and are itching to boost their output soon.

The market now expects that OPEC+ will not increase production and that is why prices are rising today, also because traders do not want to miss out on early profits from such a decision.

There is of course a downside risk when prices are rising ahead of the meeting without a clear consensus. According to initial leaks, OPEC+ has not yet reached a consensus prior to the meeting and discussions are ongoing, with opposing options being on the table.

Many OPEC members find it hard to accept that Russia and Kazakhstan are allowed to beef up their output, while others are bound to curtailments.

Yet, OPEC+ has been consistent in exercising supply-side caution when it senses demand-side risk. So the writing should proverbially be on the wall – just yesterday OPEC downgraded its demand outlook for 2021 to just 5.6 million bpd y/y growth, below Rystad’s consensus of 5.7 million bpd growth.

There are certainly supply-side concerns – if OPEC+ continues its “easy supply” policy, it risks rolling out the red carpet for US shale to stage a comeback and for other OPEC barrels, such as Iranian crude, to nip away at market share.

However, at the end of the day, OPEC+ still has the spare capacity (9.5 million bpd not including Iran and Venezuela) to hold the reign and make the market and fill in the 5-6 million bpd demand surge expected by year-end.

By our estimates, in 2021, US shale can only deliver about 10% of the increase in demand to year-end, so OPEC+ would be prudent to hold steady at the starting gate and accelerate supply in sync with demand.

This will be increasingly difficult as demand recovery becomes more uneven between the haves and have-nots, in terms of vaccinations, which is already on display in looking at real-time fuels consumption in the US, which is loosening virus restrictions, and Europe, which is again closing the fortress doors until a cure is delivered at its doorsteps.

Discussions are ongoing and we are likely in for one of the most interesting meetings of the year. And quite a decisive one.

Keeping the current production levels stable will mean prices will benefit and continue to enjoy their 60+ dollar levels.

On the other hand, starting to gradually rise production will land a blow to bullish traders, as prices can’t but fall amid the slow demand recovery that lockdowns are causing.

A lot is a stake today for oil prices and one of the most interesting things to look at today is how OPEC will handle Russia’s push for yet another boost for its production. Is it an “enough is enough” moment or is there spare capacity for a bit of extra tolerance?

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