OPEC to stick to lower output levels

OPEC+ ministers meet on April 1st to decide where to set production levels for May and likely June as well. Given that oil prices have slumped from recent highs of over USD 71/b and OPEC+ itself is warning of persistent demand softness we expect that the bloc will likely extend their current level of production cuts, including Saudi Arabia’s voluntary additional restrictions of 1m b/d. Our baseline assumptions project OPEC+ production levels staying unchanged in Q2 before output trends higher in the second half of the year in line with improvements in demand.

Oil prices fell after last OPEC+ meeting

Source: Bloomberg, Emirates NBD Research

There is an outside possibility that OPEC+ would deepen their cuts further to hasten the draw down of global crude and product inventories. We would expect to see pushback from several producers toward such a strategy, particularly from members like the UAE, but given Saudi Arabia’s current strategy of keeping output decisions secret until the last minute, we won’t rule out a further unilateral cut from the kingdom. In the scenario where output cuts are deepened we expect it would allow prices to jolt higher and affirm our already bullish outlook for oil prices: for reference, we expect Brent to record an average of USD 70/b for the rest of 2021.

Positioning in the oil market currently appears reasonably balanced between bullish and bearish. Speculative net length in Brent futures and options has come down from a recent peak of almost 11% of open interest but at around 8% hardly represents an enormously negative outlook. During the worst of the sell-off in March-April 2020, speculative net length fell to less than 2% of open interest. Likewise in WTI net length has been relatively stable for the last few weeks at around 12% of total open interest. Any surprise decision from OPEC+ later this week would likely be absorbed by the market in a relatively orderly fashion, a grind upward or downward rather than a spike or trough.

Oil market positioning ahead of OPEC+

Source: Bloomberg, Emirates NBD Research