The OPEC+ decision to roll over current cuts till the end of March has come as a surprise to the oil markets as it is different from the group's plan announced last December which has sent oil prices above $60.
Crude prices rallied last week to end in the $65-$70 range. Concerns about the speed of recovery of the global economy seemed to be one of the major drivers for OPEC+ to keep production increases to a minimum. The Saudi Energy Minister already voiced his ongoing concerns about the global economy two weeks before the OPEC+ meeting, and he pointed out that producers need not be complacent under current prices.
Another factor to consider is the fact that almost 5 million bpd of OPEC production has been off the markets since May last year. Bringing any of these barrels back could have triggered prices to fall below $60, reducing cash flows for its members, and resulting in losing the opportunity to compensate for losses made during the pandemic.
One of the key pillars of support is the rollover of the Saudi million bpd surprise cut in April, and the exemption of Russia to raise production by 130,000 bpd which may have supported the group to reach a consensus.
Furthermore, OPEC+ is not expecting US shale to boost production as prices continue to rise, giving producers an opportunity to compensate for lost revenues while preserving their market share. For shale oil to come back we need (1) to have oil demand returning to pre-pandemic levels, and (2) a sustained level of current prices over an extended period of time. This will be essential to restoring confidence in investing into the shale industry while minimizing risks. Last week’s EIA report showed the US production at 10 million bpd, 3.1 million bpd below its level a year ago. Under the current production scenarios, prices are expected to trade above $70 in March supported by prospects of market over-tightening, the increasing rate of global vaccination, and the increasing likelihood of certain countries returning to pre-crisis normality. Fuel demand in the US is currently improving, especially gasoline and kerosene whose demand rose by 942,000 bpd and 305,000 bpd w/w, respectively, to stand at 8.15 million bpd and 1.29 million bpd, respectively. Related: Oil Falls After Spiking Due To Missile Attack On Saudi Tank Farm
US oil imports are also rising, while exports are almost unchanged, suggesting rising demand amid decreasing national production. The impact of the freeze is still observed on the refining side, as the crude input to refineries was last reported to be 9.9 million bpd, reflecting a drop of 5.7 million bpd below its normal level last year. Most of the rise in gasoline demand was met using gasoline stocks which declined by 13.6 million barrels w/w. These numbers should improve in the weeks ahead as refineries on the Gulf of Mexico restart their operations.
Last weekend, the US senate has approved a $1.9 trillion relief package which is expected to increase speculation-driven price inflation. It seems price levels and even forward curves do not seem sufficient to drive an OPEC decision on easing cuts, and perhaps as we see a greater opening of global economies, an uptick in flight movements, and advancing vaccination campaigns, then OPEC+ will likely be easing cuts to meet demand growth which may happen at some point in Q-2 2021.
Last week, the OPEC+ meeting saw some unexpected results, and it is very hard to predict the next move in April and beyond. Now we have two drivers, the OPEC+ cuts and equally important the Saudi voluntary cuts. Generally, we would expect suppliers to be willing to increase production as prices continue to grow, yet when OPEC suppliers will be convinced to do so remains highly uncertain.
Even if OPEC+ agrees on a production hike in April, Saudi Arabia will likely still not be in a hurry to ease Its voluntary cuts immediately. Statements from the Saudi Energy Minister did confirm that at the last press conference, suggesting that these cuts may continue throughout Q-2 2021, and that these barrels will be brought back in a phased manner. This suggests that prices will be supported by not only the OPEC+ cuts, but also by Saudi voluntary cuts during Q-2 2021. This week, Brent has briefly traded above $70, as a result of rising tensions in the Middle East, caused by Houthi attacks on Saudi Aramco's Ras Tanura facilities over the weekend. It seems then that the geopolitical risk premium in oil is back as oil markets are growing tighter once again.
By Yousef Alshammari for Oilprice.com
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It certainly wasn’t a surprise to me since five days before the OPEC+ meeting I have been repeatedly saying in my comments to the oilprice.com articles (including my comments to this author’s article on OPEC+ before the meeting) that “OPEC+ isn’t going to rock the boat and undermine the current momentum of the global oil market and prices and therefore it is going to roll over the production cuts until the end of April. And that is exactly what OPEC+ did”. (You can read my comments to oilprice.com).
My rationale for predicting correctly what OPEC+ decision was “that Saudi Arabia will push for an extension of the current production cuts at least until the end of April to maintain the recent momentum of oil prices. Russia may not object to this simply because it has yet to benefit from the 125,000 barrels a day (b/d) of increased production granted to it by OPEC+ in February because of exceptional weather conditions in Siberia affecting production”.
The US shale oil industry isn’t expected to stage a comeback to pre-pandemic levels soon or probably ever.
A combination of the pandemic and reckless production caused the shale industry to lose some 6.5 million barrels a day (mbd) according to my calculations and not 3.1 mbd as the US Energy Information Administration (EIA) is claiming, incur hundreds of billions in debts and also lose its importance to the global oil market. The industry emerged from the pandemic virtually emaciated and demoralized needing a life support machine provided by US taxpayers to remain afloat. This is evidenced by the rise in US crude oil imports.
The crucial situation facing the US shale industry is that its fate is now in the hands of OPEC+. Were OPEC+ to go after market share, prices will fall and this will immediately and very adversely impact on shale oil production.
Brent crude price is projected to hit $70-$80 a barrel in the third quarter of 2021 underpinned by OPEC+’s recent decision to extend the current cuts until the end of April and more importantly by the fact that oil is now in a bull market that could last many years.
Judging by the impressive surge in oil prices since December, Brent could even reach $70 earlier than the third quarter. Moreover, global oil demand is going to return to pre-pandemic level of 101 mbd by the middle of this year.
Brent could also be headed towards $100 in the second half of 2022 or the first quarter of 2023 because of a fast-tightening market and the possibility of a demand-supply deficit estimated at 10-15 mbd by then triggered by a serious decline in global oil industry’s investments.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London