OPEC+ surprises market as it extends output curbs

Ann-Louise Hittle, vice president, Macro Oils, at global natural resources consultancy Wood Mackenzie, said: “OPEC+ took the market by surprise today when it decided to roll over its quota, saying that rather than anticipate a demand recovery, the group would wait to see it actually recover.

“The market was expecting a substantial increase in production because a tightening in the supply and demand balance is already evident.”

She added: “Oil prices have increased strongly in the last two months, with Brent hitting $65-$66 per barrel. Prices are rising in anticipation of a recovery in demand and limited supply growth for 2021.”

Wood Mackenzie is forecasting global stock draws for the second to fourth quarters this year. That was before OPEC+ agreed to roll over its current production restraint, with only Russia and Kazakhstan allowed small increases. Saudi Arabia is keeping its voluntary additional cut of 1 million barrels per day (b/d) – announced in January and originally due to lift at the end of this month – in place for April.

Hittle said: “Clearly OPEC+ has decided to take a cautious approach to demand recovery. 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. 

“Stocks are a lagging indicator and already the market can see solid signals of demand strength – the vaccination programme in the US, 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.”

Wood Mackenzie forecasts global demand will increase 6.3 million b/d year on year in 2021. If OPEC+ does not increase output in April, except the small amounts for Russia and Kazakhstan, the stock draw will be significantly more than 1 million b/d next month, as the summer demand season looms. We expect oil prices to rise toward $70-$75 per barrel during April. 

Hittle added: “The risk is these higher prices will dampen the tentative global recovery. But the Saudi Energy Minister, Prince Abdulaziz, is adamant OPEC+ must watch for concrete signs of a demand rise before he moves on production.  

“When compared against last year’s collapse, we expect a strong recovery in oil demand for Q2 2021, of nearly 14 million b/d year-on-year after a subdued gain of 0.8 million b/d in the first quarter for Q2 2021.  With OPEC+ production restraint in place during April, as demand surges, upward pressure on prices is likely to continue.

“By comparison to the 6.3 million b/d increase in demand this year, we forecast global supply to rise much less, at 1.5 million b/d. On this basis, the market is slipping into a period of sustained stock draw for the rest of the year.”