Today’s OPEC+ meeting could be paving the way for a gradual production ramp-up from April onwards, the details of which the OPEC+ group will likely debate in the next monthly meeting.
The size of a possible ramp-up, which we expect will not be too aggressive, will determine the direction that oil prices will take in coming months.
A key question is if a gradual production increase from April will be on the basis of the OPEC+ agreement curtailment levels, or if it will retract the Saudi million-barrel gift.
However, OPEC+ did seemed open to a low-case scenario, where demand drops further than it says it expects. And by the wording of what was discussed, the door is not closed to an outright production cut should market conditions warrant it. But let’s face it, it’s not the most likely outcome.
Extremely high compliance levels, with previously laggard nations such as Nigeria praised for compensating, offered some relief to previously grumpy OPEC+ members.
Compliance has been a thorn in previous meetings and today the mood was a bit lighter.
Given the market’s and our expectations for a gradual recovery in demand throughout the 2Q, and especially from summer onwards, OPEC+ would be able to bring during 2021 the full 2 million bpd that were originally scheduled.
Yet, the pace of the oil demand’s recovery will dictate how fast the ramp-up can be allowed to be.
Towards year-end, the market’s call on OPEC supply may even rise beyond these 2 million bpd, allowing for more volumes while still bringing storage levels back down in line with OPEC+’ goals.
Nevertheless, OPEC+ must consider the supply-side risk materializing from US shale as prices tick higher.
Back on the demand side, there has been chatter from several research arms at banks about a full recovery in global oil consumption by summer. Such forecast are surely been observed by OPEC+ and may influence the alliance’s policy.
While the forecast is certainly headline-grabbing and heavy on optimism, we do not see oil consumption crossing the 100 million bpd threshold in 2021.
Last but not least, it was evident in today’s discussions that oil stocks are a variable that OPEC+ is putting in the equation.
With OECD oil stocks keeping on falling, the market is slowly getting rid of the fat that was gathered during 2020.
Stocks will play a vital role in how quickly OPEC+ increases again supply, so what the market is looking for at the moment, is to find out when that sweet spot for stocks will occur.
Rystad Energy expects crude supply deficits throughout the summer and if they indeed materialize that will be music to OPEC+ ears.
