Oil prices got a new boost on Friday, as traders saw the OPEC+ compromise as a bullish development after the supply uncertainty that took the market by surprise since the start of the week.
Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the price rise:
"Reaching a consensus in OPEC has not been easy and the new deal is quite close to what the market was hoping for, so the oil price reaction today is understandable. Yet, despite the justified bullish reaction, caution is needed going forward.
Adding 2 million bpd of extra oil supply from January would have been exhausting for the market, so the compromise is positive.
However, this development leaves US shale producers and other market participants with less “certainty” about OPEC+’ exact production targets going forward. This lack of clarity could prove to be bullish longer out, as the OPEC+ put is not firmly in place for an extended period of time.
Traders now have a blurry outlook for planning ahead, which can bring price volatility going forward as speculations will again prevail on trading floors in absence of a concrete mid-term plan. Hedging of shale companies for future output is also made more difficult under this uncertainty.
OPEC essentially told the world that it will ‘fix’ January’s balances to a certain extent and wait and see before it decides on what to do further in time, avoiding to commit with specifics.
What OPEC+ has agreed to is a maximum tapering pace of 0.5 million bpd per month, up towards 2 million bpd target level which has been in place since 12 April 2020.
This means that OPEC+ has allowed themselves, if nothing changes in the alliance along the way, to reach this higher target by April 2021, which is somewhat close to what we believed would happen in practice even if they didn’t reach this more complicated stair-case tapering deal.
Another reason that caution is needed and prices may struggle to keep their current gains is that oil demand may take a third COVID-19 hit.
Winter is coming and California’s stay-at-home order for the state responsible for 13% of US oil demand, is close to being rolled out as ICU beds are running out.
The Christmas period is also a world-wide risk as some easing of lockdowns is expected to sweeten the pill for the festivities, creating a perfect environment for a new spike in COVID-19 infections.
Meanwhile, the global oil demand recovery is continuing in two different speeds. Asia is in a far better place than the Western Hemisphere.
The world and OPEC+ is counting on Asia to drive the globe out of the economic and oil consumption slump, and the continent is still on par to reach pre-virus demand levels by the summer of 2021.
If that happens, and we even see some positive surprise in demand from vaccine roll-outs actually impacting consumer behaviour, OPEC+ can get away nicely with this stair-case tapering during the next four months.
Nevertheless, the market euphoria will at some point soon likely fizzle out as the deal is not uniformly bullish, but rather “ok” given the demand and non-OPEC+ supply outlook.
Also the compromise deal left probably the supply hawks UAE and Russia in a good place, and Saudi Arabia for once not getting it their way.
This opens up for an interesting political impasse within OPEC+ going forward with less of a duopoly of Russia and Saudi Arabia, as the UAE could be flexing their political muscles more going forward."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/04122020/oil-prices-rise-on-trader-euphoria-after-opec-compromise/