Rising oil prices seen in the wake of Thursday’s OPEC+ meeting can be attributed to the market’s “positive perception” of the decision rather than the decision itself, experts say.
The 23-members of the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, held the 15th Ministerial Meeting on Thursday and agreed to gradually ease the current production cuts by increasing approximately 2.1 million barrels per day (bpd) up to the end of July.
The group is currently reducing its production by 7.9 billion bpd, including an additional 1 million bpd cut by Saudi Arabia.
With the new output quota, Saudi Arabia’s voluntary cut announced in February will be incrementally phased out while Russia and Kazakhstan, which were allowed to increase their production due to seasonal reasons, will be included in the new output cuts from May.
Although a "cautious approach" from pandemic-induced uncertainties marked the meeting, Russian Deputy Prime Minister Alexander Novak said the market was short of about 2 million bpd of production cuts, which signaled a rising tendency among the group for higher production levels.
Speaking to reporters after the meeting, Saudi Arabia's Energy Minister Abdulaziz bin Salman underlined "cautiousness" and also said the market has to test its psychological barrier to "see how things may turn out."
The oil markets, however, had been expecting at least a two-month rollover of the current production levels after the expected recovery in oil demand was delayed due to the third COVID-19 wave that continues to grip most of Europe.
By the time the meeting ended, Brent reached $65.16 per barrel for a 3.85% increase and the American benchmark West Texas Intermediate (WTI) was at $61.74 per barrel at the same time for a rise of 4.36%.
- Decision perceived as recovery sign
Normally, increased production should lead to lower prices, in line with the rules of supply and demand. However, experts attribute the apparent contradiction to the fact that the markets perceived the decision as a signal of recovery.
OPEC+ is trying to keep the market under its control, Julien Mathonniere, oil markets economist at Energy Intelligence Group, told Anadolu Agency.
“As a financial investor said a couple of days ago, this OPEC meeting is like a Keynesian beauty contest,” Mathonniere said, citing a concept developed by British economist John Maynard Keynes to explain price fluctuations in equity markets, the view being that much of investment is driven by expectations about what other investors think, rather than expectations about the fundamental profitability of a particular investment.
“What matters is not what OPEC is actually doing, but rather what traders think OPEC is doing, or better what traders think that other traders think OPEC is doing,” he said, explaining that the group’s expectations affect prices, even if OPEC is not really doing much.
Mathonniere believes that OPEC needs to keep the oil price structure in backwardation.
“That is, the price of oil for immediate delivery must be higher than the price for future delivery, say in three, six, or twelve months from now because if the spot price for immediate delivery is higher than future prices, it draws oil out of storage and helps global stocks to decrease, which in turn supports refiners' margins.”
- ‘Effects of decision need to be well understood’
Kevin Birn, chief analyst of Canadian oil markets for consultancy IHS Markit said while concerns remain around the demand impact from the resurgence of variants of COVID-19, growing optimism around the vaccination campaigns and the expectation over the pace of oil demand recovery has intensified.
“Against this backdrop, increasing output will help moderate the expectations around the price of oil which had escalated over the past several weeks,” Birn said.
-‘Once again, OPEC+ has taken everyone by surprise’
Ian Simm, the principal advisor at consultancy IGM Energy, reiterated that the oil markets viewed the group’s decision as unexpected.
“What is striking though is that the market has barely moved. Perhaps, as Prince Abdulaziz said, traders are considering the 30 days to go until the restrictions begin to ease, however, it is more likely that the view is that the increased production levels will be consumed locally,” Simm said.
He stressed that in Iraq, Kuwait and Saudi Arabia, domestic crude burn ramps up over summer months to fuel the growing demand for air-conditioning.
“In addition, Saudi stocks have been drawn down as it sought to more or less maintain exports despite cutting production, so these can be refilled, meaning that the impact on physical markets would be negligible,” he added.
By Sibel Morrow