OPEC+ is loosening production curbs, as demand faces the opposing forces of new Covid-19 lockdowns in Europe while the U.S. economic reopening accelerates. Oil prices rose.
Instead of maintaining quotas in May as expected, the Organization of the Petroleum Exporting Countries and top nonmembers like Russia are backing a plan to start raising them next month and into the summer.
Now, production will go up by 350,000 barrels per day in May, 350,000 in June and 441,000 in July, according to Saudi Energy Minister Abdulaziz bin Salman.
Saudi Arabia’s share of the increases will be 250,000 in May, 350,000 in June and 400,000 in July.
“The OPEC+ decision for a gradual output increase surprised some energy traders,” OANDA analyst Edward Moya said. “Expectations were for no increase in May but a stronger raise in June. Given the improving crude demand outlook in Europe, oil prices did not completely fall off a cliff given the staggered output increase across May through July.”
In March, the group surprised oil markets by continuing most of the current cuts into April, including Saudi Arabia’s earlier decision to curb 1 million barrels per day of its own output.
Oil prices have risen to over $60 per barrel since the meeting. But renewed restrictions in Europe as vaccine distribution fumbles have hit oil demand estimates. Before Thursday’s meeting, OPEC+ lowered its 2021 oil demand growth forecast by 300,000 bpd, according to a Reuters report.
“The agreement is supportive of oil prices, yet should also help avoid a sharp spike upward as oil demand picks up,” Wood Mackenzie analyst Ann-Louise Hittle said in a note, adding that U.S. oil demand should recover strongly in Q3.
Oil Prices, U.S. Stockpile Surprise
U.S. crude oil prices rallied 3% to $60.95 per barrel. For the month of March, oil fell 3.8% but jumped 22% in Q1. Brent futures rose 2.7% to $64.41 on Thursday.
While Europe locks down again, the Covid-19 vaccine rollout is picking up speed in America, a bullish sign for U.S. demand and oil prices.
On Wednesday, the Energy Information Administration reported a 900,000-barrel drop in U.S. crude inventories, the first decline in six weeks. Analysts polled by S&P Global Platts were expecting a 200,000-barrel increase. Gasoline stockpiles fell by 1.7 million barrels vs. the 1-million-barrel increase analysts were expecting.
Americans are hoping for a somewhat normal summer of travel within the U.S. and many employers are eyeing a return to offices in the early fall.
“If the Saudis decide to add to their voluntary 1-million-barrel-a-day production cut, it could create an undersupplied market this summer,” wrote Phil Flynn, senior market analyst for the Price Futures Group in a note Wednesday.
But new Covid-19 infections are again on the rise in the U.S. as a more contagious variant spreads while younger Americans wait their turn for the vaccine.
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