28 April 2021
2 mins clock icon

OPEC and partners show confidence

The bloc of oil exporters will carry out its plan to add output over the next few months even as demand risks remain high.

By Edward Bell

Oil imports expor0ts16

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.

Written By

Edward Bell Head of Market Economics

There was an error during your feedback!

Your feedback is valuable to us and will help us improve.

Edward Bell

Related Articles

Subscribe to our newsletter and stay updated on the markets

There was an error during your newsletter subscription!

Please try again to stay updated with all the latest financial news and valuable insights.

Thank you for newsletter subscription!

To stay updated with all the latest financial news and valuable insights.