The market is clearly bullish today, as traders expect a supply increase decision from OPEC+, but in a cautious manner that does not prematurely recall too much supply too soon.
Maintaining price stability at high levels, while on the same time increasing its output, could be in the best interest of OPEC+ today.
The alliance has already helped stoke Brent oil prices beyond $75 per barrel and the producers group is well aware of the impact its policies have on prices.
Prices are also rising as initial leaks suggest that OPEC+ is considering a 2 million bpd output hike from August through December, with a monthly increase of below 500,000 bpd.
If OPEC+ does keep a conservative stance and increases its production in a cautious manner, and up to 500,000 bpd is definitely cautious, prices will be supported, as demand will easily absorb that.
The world faces an imminent more than 3 million bpd in oil demand increase by the end of summer, so prices reflect the immense pressure for OPEC+ to increase supply to ease the oil price rally.
Today’s meeting is the truest test of whether OPEC+ wants to continue pushing up prices by staying behind the demand curve, or whether $75 per barrel is sufficient for a “job well done”.
Rystad’s supply-demand balances indicate that in August 2021, there is a “call” on OPEC+ to produce an extra 1.6 million bpd to keep the market in equilibrium.
However, any announcement above 500,000 bpd could swing the scale to the bearish side for oil prices after the dust settles.
The market can absorb plenty of more oil currently, but prices will have to thin down if equilibrium is the target.
Since the 9.7 million bpd cuts were enacted in May 2020, the Russia-Saudi alliance has appeared to be decently harmonious.
While Russia leads the countries that are fine producing more at a lower price, Saudi Arabia has steered the OPEC+ policy for the last 13 months, exerting its preference for caution and higher oil prices.
Also, last year’s price war between Saudi Arabia and Russia which in many ways capitulated the oil price crash last year for now seems to be resolved, and the “plus” part of OPEC+ is more inclined to participate in market management, especially as the world moves towards an Energy Transition and peak oil demand.
What OPEC+ doesn’t want is to get too far ahead of the curve and release too much supply too soon and have to backtrack and shut in production in the usually lower demand shoulder season which peaks in October.
Another reason for OPEC+ to be cautious is that while the crude balances look constructive, refined products are still seeing skewed recovery growth.
As the emergence of the Delta variant confirms, recovery from Covid-19 is uneven, with the US clearly demonstrating a strong vaccine program and demand bounce, but many countries in Asia-Pacific are still yet to lift travel restrictions or quarantine hotels.
This uneven recovery inherently skews the demand recovery not only regionally, but on a product level.
Gasoline is already on a much more robust recovery route to pre-pandemic levels, whereas jet fuel is still under immense pressure as international travel policies remain inconsistent and ever-changing.
While road fuels could brush pre-pandemic levels already in 2021, aviation will not fully be back in its demand swing until the end of 2022 or possibly into 2023.
No matter the OPEC+ decision, refineries will enter the unchartered territory of maximizing gasoline output while keeping jet fuel production in check, presenting new and unique challenges to the oil products market.
