OPEC and partners show confidence

OPEC+ has affirmed its plan to add 2m b/d of supply between May and July and scrapped the need for a full ministerial meeting. The production additions will be distributed across all members and will also include Saudi Arabia unwinding its voluntary additional cuts of 1m b/d that it introduced for February to April. The next OPEC+ ministerial meeting will take place on June 1 st.

The decision to hold will provide some relief to markets in the form of stable volumes rather than the surprise production decisions that OPEC+ has endorsed several times this year. However, the barrels will be coming onto a market that is beset by substantial demand risks, not least of which are centred on India where expanding lockdowns risk crashing oil demand in the world’s third largest consumer. OPEC+ did acknowledge that the current rise in Covid-19 cases in India and other emerging economies “could hamper the economic and oil demand recovery.”

Market moves limited so far

Market response to the OPEC+ news has been relatively quiescent. Oil futures rallied overnight and are trading sideways in early action today. Market structures are generally intact if a little bit lower than they were are the end of last week: Brent time spreads for 1-12 months closed at USD 3.91/b overnight compared with USD 4.29/b at the end of last week. Skew in the options market is showing a moderate increase in downside risks compared with where prices were ahead of the OPEC+ meeting but we feel this is valid given the uncertainty around demand in the short term. Even so, markets still don’t appear to be panicking about the drop-off in demand in India or risk that Covid-19 variants could spread and suspend global mobility on a scale that we saw in 2020.

Still expect to see prices sustained at high levels

Our expectation for oil market balances following the OPEC+ news is unchanged and we still expect to see a market deficit of more than 2m b/d on average in H2 2021, under the assumption that OPEC+ incrementally adds more barrels. That supports our view that oil prices can be sustained at high levels of USD 65/b+ in the Brent market and we are leaving our annual price targets of USD 67/b for Brent and USD 63/b for WTI unchanged.

Parallel to the OPEC+ announcement were statements from Saudi Arabia’s crown prince, Prince Mohammed bin Salman, where he outlined that Aramco may sell an additional 1% stake to a “leading global energy company” over the next few years. At current market valuation for Aramco a 1% stake would represent around USD 19bn. Given that any investment from a foreign partner would still be small we don’t believe it would have any influence on Aramco investment plans or Saudi Arabia’s oil production strategies.