OPEC+ Surprises Market, Opts Not to Increase Production
March 5, 2021
OPEC+ surprised the market and decided not to increase its production starting next month and keep it broadly unchanged. This news sent the markets higher with crude oil rallying 5% to highs not seen in over a year. Saudi Arabia urged the group to keep their output steady and allow exceptions for Russia and Kazakhstan. These two countries will be able to increase their production next month mainly for domestic use. Kazakhstan’s Energy Minister reported that Russia will be able to increase its output by 130,000 bpd , while Kazakhstan can increase its output by 20,000 bpd.
Saudi Arabia’s Energy Minster, Price Abdulaziz bin Salman, said prudence guided the OPEC+ decision. He said Saudi Arabia agreed to gradually phase in its 1 million bpd cut. He said Saudi Arabia is in no hurry to end its voluntary output cuts and would choose when to gradually phase out the reduction in the coming months. This was the big kicker. OPEC+, and really Saudi Arabia, has now put itself back in a strong position of controlling global oil prices.
Russia’s Energy Minister told the OPEC+ meeting that it is important to be careful not to destroy the balance in the market as there is still a lot of uncertainty. He said the gradual release of supply needs to be very careful.
The OPEC supply report from the meeting showed a supply deficit for every single month of this year. But they still held back production. They have the very delicate job of keeping price up, but not too high to allow US shale to come back. This will be interesting to see how shale progressive going forward. The Dallas Federal Reserve put out a study and the highest breakeven price for existing wells was $36. Crude oil WTI future are above $50 a long way out in the forward curve, almost 5 years. This could allow for some hedging but the outlook for most shale firms is a slow rebound so we will see how things progress in the coming year.
There have been a lot of people that seem to have a sense of this concern, but GasBuddy has put it out there for all of us. According to GasBuddy, the average US price of gasoline could reach a more than six year high of $3 by Memorial Day on May 31st.
Analysts and traders said a four-month rally in the oil futures price from below $40 per barrel to above $60 per barre is out of step with demand, with physical sales only expected to match supply later in 2021. The price has surged since the start of November, supported by expectations of an economic recovery as governments promise more stimulus, producers rein in output and vaccine rollouts offer hope that the worst effects of the COVID-19 pandemic are over. However, physical demand for crude from refiners and other end users has yet to catch up, with cargoes to key markets like China broadly trading at lower prices amid sluggish sales. J.P. Morgan said the benchmark Brent futures contract was “running two quarters ahead and $4 above what fundamentals warrant.” The International Energy Agency does not expect demand to catch up with supply until about the third quarter.
“OPEC surprised us by rolling over the cuts…The message OPEC is sending the market is that they’re quite willing to see oil prices run hot and ultimately, go a long way in reducing the inventory overhang built last year because of COVID-19,” said Bart Melek, head commodity strategist at TD Securities.