While the third COVID-19 wave caused by the mutating virus continues to grip most of Europe, experts say it would be best if OPEC+ maintains the current production quota for another two months to curb oil demand amid economic uncertainty.
An upward oil price trend gained momentum soon after the previous meeting of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC countries, known as OPEC+ in early March when major oil producers agreed to maintain production levels for April. Brent recorded a 13-month-high by hitting over $71 a barrel on March 8 while WTI reached over $67 a barrel on the same day.
However, oil prices have retreated over the past two weeks due to renewed coronavirus cases, especially in European countries, which have been followed by more restrictions and/or lockdowns.
The slowdown in vaccine campaigns, coupled with concerns about their safety after several European countries banned the use of a vaccine developed by AstraZeneca, also increased investor jitters in the oil market over the likelihood that oil demand would take a considerable time to recover. On March 23, Brent fell by 15.6% and WTI by 12% to reach $60.27 and $57.25, respectively.
Hopes are now pinned on the outcome of the 15th OPEC and non-OPEC Ministerial Meeting on Thursday.
Speaking to Anadolu Agency, Bora Bariman, the managing director of energy advisory company, Hormuz Straits Partnership, said the rollover of the current production levels for at least two or three months “will be most supportive of [oil price] stability within the $60-$65 range.”
However, he said that demand is not sharply accelerating at the moment. “Rolling over the existing quotas for an additional two months may be the right balance given the difficulty of predicting demand movements further into the future.”
Stressing that the market expectation was on the same page, Bariman said the priority for OPEC+ is to avoid any increase in inventories that refineries cannot absorb, but he said prices would be raised on evidence of a strong demand increase.
Maintaining market share in the face of non-OPEC+ competition is also important for the group members, Bariman said, noting India’s increasing crude imports from the US to diversify its options in case of further price rises.
“Gulf producers will be wary of this trend taking hold,” he warned.
He also cautioned that OPEC+ countries must assess the extent of global demand recovery.
“We all want to get back to normal, but COVID remains as a cloud over Europe. This uncertainty holds back travel, trade and demand normalization.”
According to Bariman, international travel has not recovered to the extent to spark demand for incremental crude barrels from refineries to supply a big increase in jet fuel output.
Given these dynamics, he said the market expects the quotas to remain in place for a further two or three months.
“Increasing production quotas would surprise the market and may push prices below the $60-$65 range,” he warned.
-Output rise may exert price pressure if not matched by demand recovery
Chief Executive Officer of energy and geopolitical advice, research and training company, Crystol Energy, Carole Nakhle said the OPEC+ group continues to play a major role in the rapid and impressive recovery in prices from their lows in April 2020.
“As such, any relaxation of the cuts can put a downward pressure on prices especially if not matched by a continuous recovery in demand,” she said.
OPEC+ countries will monitor not only oil demand recovery but also oil inventories and supply growth outside the producers’ group while determining how many barrels to withhold from the market.
Although OPEC+ argues that it aims to achieve market stability, indirectly its members want to see oil prices reaching sustainably higher levels, Nakhle said, noting that “attempts to stabilize global oil markets come at a substantial cost and require tremendous effort, while success remains limited.”
Furthermore, she added that it was obvious that OPEC’s switch to monthly reviews and decisions contributed to increasing ongoing market instability since December 2020.
“All options are on the table, though the recent retreat in prices compared to only a few weeks ago is giving market observers a stronger belief that production cuts may be rolled out for another month or so,” she said.
- OPEC+ production cuts
On March 4, OPEC+ members rolled over existing production quotas until April. However, Kazakhstan and Russia were excluded and allowed marginal production increases by 130,000 and 20,000 bpd, respectively due to ongoing seasonal consumption patterns. Saudi Arabia also decided to keep its voluntary cut of 1 million bpd.
Including Russia and Kazakhstan’s output rise exemption, the group agreed to reduce its production by 7.9 billion bpd in April.
Previously in February and March, Russia and Kazakhstan collectively increased their output by 75,000 bpd while the rest of the group held output steady.
By Sibel Morrow