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Oil Rebounds On Surprise Crude Inventory Draw

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Yousef Alshammari

Yousef Alshammari

Dr. Yousef Alshammari is the CEO and Head of Oil Research at CMarkits, London, UK. He is a former Research Fellow at OPEC with a…

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Oil Markets Already Priced In An OPEC+ Output Cut Extension

The closure of the Suez Canal led to a moderate price rally last week, which came after a significant decline in oil prices triggered by new and stringent lockdowns in Europe. The impact of the Suez Canal crisis on oil markets has been marginal due to a number of factors including (1) slowing demand especially in the EU, (2) relatively high inventory figures, and (3) the low volumes of crude oil passing through the canal (less than 5% of global supply).

Now the shipping channel has been unblocked again, the markets have priced in a short delay as more than 400 ships remain stuck, waiting to pass the waterway. The total amount of damage remains to be seen, but we expect oil tankers not to change their shipping routes as this is likely to increase costs and risks.

The incident, on the other hand, may lead to increased investment in the capacity expansion of the SUMED pipeline, which currently stands at around 2.5 million bpd, running from the Ain Sokhna terminal in the Suez Gulf to offshore Sidi Kerir in Alexandria on the Mediterranean Sea.

OPEC+ is expected to extend current cuts through May

OPEC+ is scheduled to hold a meeting this week to decide on its production policy in May. While multiple factors may impact the group's decision, the markets already priced in an expected rollover of current cuts through May.

Platts data for February 2021 concluded that current global oil demand stands at around 92 million bpd while global supply lingers around 91 million barrels per day, of which some 25.7 million barrels are produced by OPEC.

Related: Iran And China Strengthen Oil Ties With 25-Year Strategic Deal

Given the uncertainty about the global demand recovery, OPEC+ is expected to continue to roll over its current cuts through May. Yet, if OPEC+ decides to roll over current cuts, the question remains whether Russia, and perhaps Kazakhstan will continue to be allowed to increase production to pre-agreed levels, given the expected rise in demand in May.

Russia is set to increase its production by 125,000 bpd in April from 9.18 million bpd in February. The group is also expected to emphasize compliance levels especially for countries that failed to meet their output quota in recent months such as Iraq and Nigeria.

OPEC compliance for March is expected to exceed 100% supported by the voluntary Saudi cuts. We expect Saudi Arabia to sustain its 1 million bpd voluntary cuts in May, which is likely to keep crude prices steady during this period of uncertainty about crude demand and a new wave of COVID infections. Based on that, CMarkits expects Brent prices to trade around $60-$63 in April, assuming the resumption of shipping through the Suez Canal and continued lockdown measures in Europe throughout April.

US shale oil producers aren’t rushing to boost oil production despite the rise in WTI prices. Production only rose by some 100,000 bpd w/w to stand at 11 million bpd, while the number of oil increased to 324, from 309 rigs a month ago. Yet, sustained high prices could ultimately lead to a moderate rise of between 500,000 and 1 million bpd. Drillers may see themselves incentivized by not just higher crude prices, but also lower costs to service debt. Related: Russia Aims To Raise Production, Backs OPEC+ Cut Rollover

US oil stocks rebounding and diesel consumption falling

US oil demand has slowed down somewhat last month, which is reflected by increasing crude inventory levels and declining diesel demand. Crude stocks have risen during the last 4 weeks, in part due to the lasting effects of the Texas Freeze. U.S. oil inventories stand at 502.7 million barrels, 46.4 million barrels above their level a year ago. These figures are expected to be a point on the agenda during the OPEC+ meeting, as they offset the group’s efforts in 2020 to bring inventories down to average levels.

U.S. oil refineries are almost back to their processing levels prior to the cold blast, at 14.39 million bpd, yet they continue to process 1.45 million bpd below their pre-pandemic levels. Currently, demand for petroleum products stands at 18.70 million bpd, around 718,000 bpd below its level before the pandemic.

By Yousef Alshammari for Oilprice.com

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