OPEC and its allies (OPEC+) have agreed to scale back oil output cuts by 350,000 barrels per day (bpd) for May and June, and by 450,000 bpd in July.
Additionally, Saudi Arabia will increase its output by 250,000 bpd in May, 350,000 bpd in June, and 400,000 bpd in July, reducing its voluntary production cut of 1 mbpd.
“The agreement is supportive of oil prices, yet should also help avoid a sharp spike upward as oil demand picks up,” said Ann-Louise Hittle, vice president of Macro Oils at Wood Mackenzie. “Wood Mackenzie forecasts a strong recovery in oil demand by the third quarter for the US and expects total global oil demand to gain 6.2 million b/d year on year in 2021.”
The output hike is optimistic, as uncertainty remains about future oil demand, raising questions about whether it is too early for the market.
“The outcome of the meeting is also revealing that even though the group’s own experts warned about the lagging oil demand recovery and the market risks that the extended lockdowns are bringing, decision-makers have another vision,” said Louise Dickson, a Rystad Energy oil markets analyst.
Hittle noted that the decision was in line with Wood Mackenzie’s outlook for the next two quarters of 2021. “We see the supply and demand balance tightening in both quarters with global stock draws in each. This view takes into account our expectation that today’s meeting would see a phased increase of production from May,” she said.
Meanwhile Rystad Energy noted that the decision, while tied to expectations of oil demand growth in the summer, “likely came as a result of some producers feeling that the relation of who produces and how much was becoming a bit… unbalanced.”
There have been several laggards in the group who have been unable to meet the targets set by OPEC+, and others, namely Saudi Arabia, making additional volunatry cuts to help balance the group’s output levels.
“The decision by OPEC+ shows that patience was exhausted among many producers, who could not accept that some countries – and mainly Russia – was allowed to constantly hike their production while others kept it flat,” Dickson noted.
The next OPEC meeting is scheduled for 28 April.
