The OPEC meeting came and went without much of a hitch. But while market analysts and the media had assumed that a rollover of the current level of production cuts was in the bag, OPEC surprised us all again.
Saudi Arabia had hinted prior to the meeting that the cartel was likely to roll over the cuts when it pushed for a rethink of its oil demand projections for the rest of the year, which it thought was too high. It also urged “caution” in this fickle market. This suggested that Saudi Arabia believed oil demand was not as high as they had anticipated, and therefore, there may not be enough room for members to increase production.
But that proved not to be the case. In light of global pressure on the group - both from the United States and India - to supply more crude oil to the market, the result perhaps isn’t all that surprising. Saudi Arabia denied that the pre-meeting phone call with Washington had anything to do with the meeting’s outcome, but we believe the media is discrediting the amount of influence this interaction had. To this end, Saudi Arabia raised no objections to a gradual production increase during the OPEC meeting and pointed out that domestic demand would rise over the summer months and that a production increase may be necessary.
OPEC’s meeting was quick on Thursday. Saudi Arabia started the meeting with a thinly-veiled threat that it would decide on the fate of its own voluntary production…
The OPEC meeting came and went without much of a hitch. But while market analysts and the media had assumed that a rollover of the current level of production cuts was in the bag, OPEC surprised us all again.
Saudi Arabia had hinted prior to the meeting that the cartel was likely to roll over the cuts when it pushed for a rethink of its oil demand projections for the rest of the year, which it thought was too high. It also urged “caution” in this fickle market. This suggested that Saudi Arabia believed oil demand was not as high as they had anticipated, and therefore, there may not be enough room for members to increase production.
But that proved not to be the case. In light of global pressure on the group - both from the United States and India - to supply more crude oil to the market, the result perhaps isn’t all that surprising. Saudi Arabia denied that the pre-meeting phone call with Washington had anything to do with the meeting’s outcome, but we believe the media is discrediting the amount of influence this interaction had. To this end, Saudi Arabia raised no objections to a gradual production increase during the OPEC meeting and pointed out that domestic demand would rise over the summer months and that a production increase may be necessary.
OPEC’s meeting was quick on Thursday. Saudi Arabia started the meeting with a thinly-veiled threat that it would decide on the fate of its own voluntary production cuts of a million extra barrels per day only after the OPEC+ group had decided on the rest of the production cuts. In other words, if the group decided to ramp up production, Saudi Arabia would also ease up on its own voluntary production cuts. The Saudis appear to be done with doing all of the heavy lifting for OPEC.
During the talks, some members (Nigeria, Angola, Oman, Bahrain, Brunei, and Kuwait) were reportedly on board with the idea of rolling over the cuts. The UAE said they would support a one-month rollover but wanted to see a gradual easing of the production cuts after that. Algeria suggested a 2-month rollover. Azerbaijan supported a one-month rollover.
In the end, OPEC+ will increase its overall production by 350,000 bpd in May, 350,000 bpd in June, and 441,000 bpd in July. Add to that Saudi Arabia’s easing of its voluntary portion of the cuts by 250,000 bpd in May, 350,000 bpd in June, and 400,000 bpd in July, and the overall easing will be 600,000 in May, 700,000 in June, and 841,000 in July.
Well, kind of. None of this accounts for the exempt members. Iran, Libya, and Venezuela have all increased production over the last month. For March, OPEC’s production was up by 300,000 bpd to 25.33 million bpd.
In all the shock of the increase in production, one other aspect of the meeting was overlooked. The overproducers in the group (such as Iraq and Kazakhstan) were given another three months to make up for their overage. Saudi Arabia gave the requisite tongue lashing to those “free riders” during the meeting.
Also overlooked is the fact that actual exports play a significant role in determining oil prices and market balance. The market will be watching Saudi Arabia’s exports specifically - in particular their oil exports to the United States - to determine how to react to the increase in production cuts.
Prince Abdulaziz said after the meeting that he expects oil stocks will return to their five-year average by June or July.
