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OPEC surprises again

Edward Bell - Senior Director, Market Economics
Published Date: 04 April 2021


OPEC+ surprised oil markets at the last minute by choosing to increase production over the next three months, rather than roll-over output cuts as we and the market had expected. The producers block is going to add roughly 2m b/d back to markets from May to July in the form of higher production allocations for each member along with Saudi Arabia rolling back its voluntary 1m b/d output cuts.

OPEC production outlined in 2021 so far

Source: OPEC, Emirates NBD Research

Considering that OPEC+ had started the week by downgrading its demand expectations and some ministers, most importantly the Saudi energy minister Prince Abdulaziz bin Salman, had been warning on the outlook for oil demand, the decision to raise output comes as a sharp about face. OPEC+ has painted the increase as responding to improvements in the market thanks to vaccination and fiscal stimulus packages and oil prices responded favourably with Brent futures rising 2.1% on the news in what was a holiday shortened week.

In terms of the production profile for economies in the Gulf the changes are relatively modest. For the UAE we had expected an annual drop in oil production of 6.8% prior to the latest OPEC+ decision and that now moves to a 6.6% decline. For Saudi Arabia the gains are more meaningful as the country unwinds its voluntary cuts, moving from a 5.1% drop y/y in oil output to a 3.1% decline. However, those growth rates are premised on OPEC+ gradually unwinding its production cuts throughout the rest of the year. Given the policy choices taken so far in 2021 though, we don’t have a strong conviction that OPEC+ will “set it and forget it” when it comes to production for the rest of the year.

While the signals from this latest OPEC+ meeting are positive they do represent a reversal from the policy we saw only as recently at the March meeting. Coordinating OPEC+ production to near-term targets remains an enormous risk to stable oil prices this year and while we are holding to our expectation for a bullish base case to oil prices we would stress the potential for sharp swings remains high.