Oil prices are pulling back this week as concerns about the rising number of COVID-19 cases and imposed lockdown measures in Europe and many other countries around the world continue to be the main cause of uncertainty in the markets. But despite all the volatility, the near-term forecasts remain bright.
OPEC+ decision seen bullish for the markets
The somewhat surprising decision from OPEC+ to ease its production cuts by 2.1 million bpd did not lead to a collapse in prices, on the contrary, oil prices were up by almost 4% shortly after the OPEC+ meeting concluded. Multiple factors contributed to the group’s decision to ease cuts, including (i) the slow increase in production over a period of 3 months, (ii) the incremental production from OPEC may be partially absorbed by electricity generation over summer, (iii) the stringent compensation targets to be met by many OPEC+ members which may partially offset the level of production rise, and (iv) the optimism about return of demand during the summer which may exceed existing global supply.
The new deal states that OPEC+ will increase its production by 350,000 bpd in May, 350,000 bpd in June, and 450,000 bpd in July. Furthermore, Saudi Arabia which has been unilaterally cutting an additional 1 million bpd since February, will start bringing back its voluntary cuts by 250,000 bpd in May, 350,000 bpd in June, and 400,000 bpd in July. Yet, there are currently around 3 million barrels to be compensated for by the end of September with compensation plans to be submitted by mid-April.
With this decision, OPEC+ is testing the market, and potential amendments are still possible when the group meets again at the end of this month. Next to this, the increase in production from Russia and Kazakhstan which was granted in the last two months will be included in the new production quota, ensuring a fair distribution of production cuts for the participating members. All in all, this decision suggests that OPEC+ is taking an optimistic view of demand recovery in the second half of the year. And while some say that OPEC+ relies on guesstimates, wider crude trading spreads, refinery runs and rising demand for aviation and road fuels support this view.
The decision may also have been influenced by concerns of rising energy prices in major consuming countries. This is seen by the decision of Saudi Aramco to hike its light crude prices to Asia by $0.40, while reducing them by $0.10 to the US and Europe. This move reflects growing demand in Asian markets where Aramco sells about 50% of its products.
US products demand exceeds pre-pandemic levels
Commercial crude oil inventories in the US are not currently in line with OPEC’s expectations, and remain well above 2015-2019 average levels. Yet, the rise in US crude inventories can largely be attributed to the effects of the Texas Freeze which has offset some of the hard work done by OPEC+ last year.
The latest EIA data shows that crude oil inventories dropped by 3.5 million bpd to stand 498.3 million barrels. US refinery input also continues to recover and currently stands just over 15 million bpd, up by 103,000 bpd w/w, compared with 15.85 million bpd in 2019. Petroleum product demand already zoomed past its pre-pandemic levels last week at 20.31 million bpd, compared with 19.99 million bpd in 2019. Related: Iran’s Comeback To Oil Markets Unlikely To Cause Price Crash
Return of Iranian supply could be a concern to the market
In the meantime, the markets are concerned about not only the speed of demand recovery, but also the anticipated extra supply coming from Iran. The US and other European countries are holding indirect talks with Iran in Vienna. The chances of success of these talks remain highly uncertain, but in the meantime, Iran is ramping up crude exports to China at discounted prices. According to FGE, Iranian exports rose to 1.3 million bpd in February. At the moment, OPEC does not seem to be concerned about the rise in Iranian crude oil exports.
Another, perhaps underestimated concern for the market would be the strengthening of the US dollar index, fueled by the increase in the US treasury bond yields. The latest, stronger-than-expected US jobs report has prompted traders to price in an earlier start to interest rate hikes by the Federal Reserve.
By Yousef Alshammari for Oilprice.com
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