Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman has been urging OPEC producers to keep a tight rein on output, fearing additional crude could flood the world’s markets and cause prices to drop.
Recently, the oil-exporting countries, also called OPEC Plus, agreed in its last meeting on a modest output increase over the next three months. The prince took into consideration the views of other key producers like Russia and the UAE to keep them from going their own way.
“It is not my decision, it is everybody’s decision,” he said at a news conference after the OPEC Plus meeting on April 1st..
Today, Brent crude is maintaining its level of $63 although lower than its price on April 1-2 when it was up about 3.4% to $64.86 a barrel, following OPEC’s meeting.
Production increase schedule
Under the new deal, OPEC Plus will gradually increase production by 350,000 barrels a day in May and June and 441,000 barrels a day in July. Over the same period, the Saudis will also relax the 1 million barrels a day they have voluntarily kept off the market, bringing the total increase to about 2.1 million barrels a day by July.
The plan “points to a still cautious and orderly ramp-up from OPEC Plus, still allowing for a tight oil market,” rather than a flood, analysts at Goldman Sachs wrote in a note to clients on the day of the agreement.
OPEC Plus also retains the option of adjusting output at monthly meetings, and Saudi can also take unilateral decisions to trim supplies as early as the group’s next meeting on April 28.
No more price pendulums?
The price rise and stability might have come somewhat as a surprise, but it reflects the fact that now the market knows what OPEC Plus plans for the next three months, and clarity means a semblance of certainty in an excessively uncertain world.
Production outages and deliberate reductions certainly have a big part to play in price movements.
News that OPEC’s total oil production had exceeded self-imposed quotas by as much as 3 million bpd in February, from 2.7 million bpd in January weighed on oil prices.
News about rising Iranian production has been circulating for a couple of months now after the Biden administration signaled it was open to lifting Iranian sanctions. Prices could be impacted negatively as reports about rising Iranian oil exports, mostly to China, materialize.
Iran, exempt from making voluntary cuts because of U.S. sanctions, pumped more in March, driving a 200,000 bpd rise in the group’s output to 25 million bpd.
And now, even as OPEC Plus agrees to a 350,000-bpd addition to total production in May, individual members are free to boost their exports by more than that. They’ll just take it from their storage tanks, which are still full after the demand crisis in 2020.
And so what matters (for prices) is how many barrels leave their ports every month as the actual proof of how strong demand is, not production but exports.
Oil growth forecast
On April 13, 2021, OPEC raised its forecast for growth in world oil demand this year on expectations the pandemic will subside, providing help for the group and its allies in their efforts to support the market.
Demand will rise by 5.95 million barrels per day (bpd) in 2021, or 6.6%, OPEC forecast in its monthly report. That is up 70,000 bpd from last month.
The upward revision marks a change of tone from previous months, in which OPEC has lowered demand forecasts because of continued lockdowns.
Oil gained further towards $64 a barrel after the report was released on Tuesday. Prices have risen to pre-pandemic highs above $70 this year, boosted by anticipation of economic recovery and OPEC Plus supply restraint.
The group raised its forecast of 2021 world economic growth to 5.4% from 5.1%, assuming the impact of the pandemic is “largely contained” by the beginning of the second half of the year.
OPEC Plus cut supply by a record 9.7 million bpd last year to support the market as demand collapsed.
With higher demand and steady non-OPEC supply, OPEC raised its estimate of global demand for its crude to 27.4 million bpd this year.