The oil market has finally reached a stage that hints recovery, as it is the first time in a year that everyone expects OPEC+ to justifiably bring more output back to production mode.
The current oil price levels, greatly supported by OPEC’s existing policy, are more than healthy and have already triggered increased oil production activity across the Atlantic in the Americas.
OPEC+ reasonably will not want to miss out and not taste the cake it baked itself with hard work. Many members of the alliance believe that it’s about time they enjoy the fruit of their restraint and raise oil output.
Back in January Russia led the voices that already wanted to hike production, but a massive 1 million extra bpd cut by Saudi Arabia stole the show and once again brought overall OPEC+ production even lower.
As a result, this is the first time that OPEC+ is really about to put an end to the trend. It is a direction-changing moment, a time that OPEC+ is now seeing as a likely start of its production recovery.
Amid expectations that OPEC+ will increase its output, the reason oil prices do not fall even more is that some production comeback is actually expected by traders already.
The market understands that oil prices are healthy enough for more product to be unearthed, the wild card now is how much more product.
If OPEC+ decides to lift output by 500,000 barrels per day, then, even though prices will reflect the development, the effect will be marginal.
A larger production boost by OPEC+ though could trigger a deeper decline in oil prices. However, since they are already topping 60 dollars, it won’t really be such a terrible blow. Profitability remains even below that threshold anyway, at above 50 dollars.
The elephant in the room is again, who else, Saudi Arabia. On top of its OPEC+ policy-related production cuts, the kingdom has curtailed another million barrels per day. Everyone wonders what will happen to these.
Even if OPEC+ decides a modest output hike from April, if Saudi Arabia brings back that extra million barrels the impact will be quite massive.
Oil prices rose by several dollars when the Saudis announced their surprise decision to remove that production two months ago and these extra dollars can be cut back if that soft pillow is suddenly lost.
Unexpected policy changes of that magnitude entail the risk of large market reactions, so in the coming OPEC+ meeting the Saudi decision could weigh even more in importance than the group policy.
Our market balances indicate that theoretically OPEC+ could raise production by as much 1.3 million bpd in Apr-21 and keep the market balanced.
We do not see this as a likely outcome, however, and believe the group will stick to its previous deal to not increase production by more than 500,000 bpd on a monthly basis.
We also expect Saudi Arabia to gradually bring back its extra 1 million bpd in cuts, which are not officially part of the agreement.
Later in 2021, Saudi Arabia may slightly cut back on production volumes in order to accommodate increasing Iranian supplies towards year-end.
Looking at global oil demand, recovery will speed up from the third quarter of the year, when international aviation returns and structural growth of road transportation and petrochemicals picks up.
Our estimate for the first half of the year now stands at 93.2 million bpd and for the total of 2021 at 95.3 million bpd.
We expect the negative impact of Covid-19 in the transport sector to dissipate completely by the end of 2021.
Road transport fuels such as gasoline, diesel and gasoil will recover above pre-virus levels by the beginning of 2022 in our forecast and will be primary drivers of demand growth in 2022 and beyond.
Jet fuel demand, however, will likely remain depressed throughout 2021 and 1H22 as international aviation restrictions linger.
