Oil prices continue to rise as the previous day’s OPEC+ meeting paved the way for stock draws and surprised the market.
Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, has commented on the day's developments:
"Oil prices are once again reaching new highs and that was exactly what OPEC+ hoped for.
Even though it’s a day after the OPEC+ meeting, the oil price gains are being extended as market balances got a boost very few were expecting just a few days ago.
A logical step - since prices were already over US$60 – could have been to increase production from April by a fair margin and not roll-over the current output levels.
However, OPEC+ decided to show remarkable restraint and keep production stable in an effort to see stock draws accelerate and to get rid of lots of extra product that has been filling the storages during the pandemic’s worst days.
That move in itself also helps prices approach US$70 dollars per barrel. The speed that prices rose since the doom days of negative levels has been unprecedented.
There is no doubt that the meeting’s outcome is a win for the restraint-minded Saudi Arabia and other supply doves in the group, who are happy to see oil prices near US$70 per barrel to plump up ailing budget deficits.
At the same time, the decision seems to keep everybody happy as both Russia and Saudi Arabia kind of both got it their way.
Russia’s plead to be allowed to increase production to meet rising domestic demand was heard, while the Saudi’s call for “caution and vigilance” was also met as the group is keeping its powder dry, including the entire 1 million bpd of extra cuts for at least one more month.
The extra 150 000 from Russia and Kazakhstan send the OPEC+ total production higher to 34.1 million bpd for April.
One of the reasons the market is continuing to react positively today could be that OPEC’s own balances suggest very steep draws.
The paper market is cheering, but it remains to be seen if the physical market will in fact tighten as much as the paper market is pricing in.
If vaccination campaigns bear the desired fruit and demand comes back quickly the market may get super-tight in the second half of the year, sending oil prices violently higher - unless OPEC+ opens the supply spigots more.
Going forward there is a big upside for prices if demand doesn’t lag much longer. And there is also opportunity.
The US and other non-OPEC+ producers could now be seeing a major opportunity to fill in the market with more of their product, as there is demand for it.
Even healthier prices could motivate investments and maximise production capacity utilisation that no one expected previously.
Traders should keep a close eye at US shale as now there is money to be made, while OPEC+ allows it."
Read the article online at: https://www.oilfieldtechnology.com/special-reports/05032021/oil-prices-continue-to-gain-on-opec-meeting-aftermath/