OPEC+ expressed growing confidence in the global economic recovery by agreeing to increase oil production gradually in the coming months.
Before meeting, the cartel had been widely expected to maintain its cautious stance by rolling over the current supply cuts, just as it did last month. Yet Saudi Arabia and its allies showed they are more convinced now that fuel demand is on a firmer footing after a yearlong beating from the coronavirus. Reuters reported.
As countries like the U.S. rapidly expand their vaccination programs, there are growing signals that the oil market is healing. Recently, American refiners processed the most crude since the pandemic started as they prepared for a surge in driving and flying.
Although European oil consumption is weak as France, Germany and Italy extend or impose new lockdowns, demand indicators from China remain strong. The global seven-day average of commercial flights taking off each day hit on a post-pandemic high of 77,708 on Wednesday, according to data from Flightradar24.
“Even in those sectors that were badly hit such as airline travel, there are signs of meaningful improvement,” Saudi Energy Minister Prince Abdulaziz bin Salman said at the opening session of the OPEC+ videoconference.
The Organization of Petroleum Exporting Countries and its allies will add more than 2 million barrels a day to world oil supplies from May to July. That will restore about a quarter of the crude they are still withholding after making deep cuts a year ago in response to the pandemic.
With oil prices firmly above $60 a barrel, the group has been under pressure to open the taps. Other commodity costs have also been soaring, leaving central banks from the U.S. to China grappling with the risk of higher inflation just as their governments are pouring trillions of dollars into fiscal stimulus.
Major consumers including America and India have been calling on OPEC+ to keep prices under control. U.S. Energy Secretary Jennifer Granholm phoned her Saudi counterpart on the eve of the cartel’s meeting to highlight the importance of affordable energy. Prince Abdulaziz told reporters that they didn’t discuss the oil market.
I had a productive call with Saudi Energy Minister Abdulaziz bin Salman al-Saud today. We reaffirmed the importance of international cooperation to ensure affordable and reliable sources of energy for consumers.
The 23-nation coalition will boost output by 350,000 barrels a day in May, add the same volume again in June and increase by 450,000 barrels a day in July, Prince Abdulaziz told reporters after the meeting. On top of that, Saudi Arabia will roll back its voluntary extra 1 million barrel-a day cut, adding 250,000 barrels a day in May, 350,000 in June and 400,000 in July, he said.
“OPEC+ agreed today to cautiously increase production quotas,” Ann-Louise Hittle, Wood Mackenzie Ltd.’s vice president of macro oils, said in a note. “The agreement is supportive of oil prices, yet should also help avoid a sharp spike upward as oil demand picks up.”
Brent crude rose after the decision, climbing 3.2% to $64.75 a barrel in London.
The Saudi minister said OPEC+ was now “testing” the market, and has the opportunity to reverse course if necessary at its next meeting on April 28.
As the world’s largest crude exporter, the kingdom has an unrivaled overview of the health of the global economy. Its state-owned company, Aramco, has visibility of oil demand two months in advance — the time period in which it informally receives orders from global refiners. So the decision to increase production indicates that Riyadh is seeing sufficient demand for the supplies it will restore in May and June.
“We need to keep our finger on the market pulse and not allow an overheating or a significant deficit,” Russian Deputy Prime Minister Alexander Novak said at the opening session.
For the last two months, Russia and Kazakhstan have been boosting their output while everyone else in the group kept theirs unchanged or cut even deeper. Thursday’s agreement was also an effort to diminish the internal strains this policy was causing.
After effect of supply hike
Brent crude futures for June fell 33 cents, or 0.5%, to $64.53 a barrel by 0206 GMT while U.S. West Texas Intermediate crude for May was at $61.20 a barrel, down 25 cents, or 0.4%.
Both contracts settled up more than $2 a barrel on Thursday as investors viewed the OPEC+ decision as an affirmation of demand-led recovery and optimism was boosted by U.S. President Joe Biden’s $2 trillion infrastructure spending plan. Markets were closed on Friday because of the Easter holiday.
The Organization of the Petroleum Exporting Countries, Russia and their allies, a group known as OPEC+, agreed to ease production curbs by 350,000 barrels per day (bpd) in May, another 350,000 bpd in June and further 400,000 bpd or so in July.
The decision came after the new U.S. administration called on Saudi Arabia to keep energy affordable for consumers despite demand concerns as parts of Europe remained under lockdown while Japan could expand emergency measures as needed to contain a new wave of coronavirus infections.
Under agreement, OPEC+ cuts would be just above 6.5 million bpd from May, compared with slightly below 7 million bpd in April.
Most of the increase in supplies will come from the world’s top exporter, Saudi Arabia, which said it was phasing out its extra voluntary cuts by July, a move that will add 1 million bpd. Following that, Saudi Aramco raised official selling prices (OSPs) for May to Asia on Sunday.
“The raised output was followed by an increase in the OSP, which I think in tandem shows the confidence the bloc has in demand recovery,” OCBC economist Howie Lee said.
Presently, investors are focused on indirect talks in Vienna between Iran and the United States as part of broader negotiations to revive the 2015 nuclear deal between Tehran and global powers.
Ahead of the talks, Iran’s foreign ministry said it wanted the United States to lift all sanctions and rejected any “step-by-step” easing of restrictions.
Eurasia’s analyst Henry Rome said he expects U.S. sanctions, including restrictions on the sale of Iranian oil, to be lifted only after these talks are completed and until Iran returns to compliance.
“Diplomacy could stretch for months and nuclear compliance could take as long as three months,” he said in a note, adding that implementation of such a deal and a ramp-up of oil exports could stretch into early 2022.
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