For the second consecutive month, the Organization of Petroleum Countries and the non-OPEC oil exporters in the “plus” group that together make up OPEC+ surprised oil markets, this time with a decision to increase output.
The second surprise from the virtual OPEC+ meeting Thursday is that oil prices finished the trading day near the highs of the day’s activity. Ultra low sulfur diesel on the CME commodity exchange settled at $1.8325/gallon, the highest settlement since the March 17 settlement of $1.9061/g. The increase for the front month May contract was 6.18 cents/g.
Meanwhile, the price of West Texas Intermediate crude oil, the U.S. benchmark, rose $2.29/barrel to settle at $61.45/b.
According to press reports, the OPEC+ group, which in early March chose to hold production steady even as oil prices were posting significant gains, decided this time to add roughly 2 million barrels/day to world production between May and July. That decision was not what pre-meeting conventional wisdom held; instead, the expectation was that OPEC+ would hold to its decision of two months ago.
In turn, that decision in early March was the opposite of what conventional wisdom held back then. The assumption then was that faced with rising prices, OPEC+ would put more oil onto the market. But the group chose to hold steady.
The news of the OPEC+ decision this time came out around midday U.S. time. At that point, oil prices were near their highs of the day. Despite the surprise decision to add to supply, prices did not decline. For example, the ULSD settlement of $1.8316/g was less than 0.5 cents below the $1.8363/g high price for the day. The low for the day was $1.7683/g.
The OPEC+ decision comes after a volatile month in which the benchmark crude price ultimately started and finished at about the same place, roughtly $63.60 to $63.70/b. However, the ULSD price on CME rose over the month from about $1.77/gallon to $1.83/gallon.
The additional supply to be put on the market will come from two sources. One is Saudi Arabia unwinding 1 million b/d of supply cuts that were already in place. The second is a series of increases, starting with 350,000 b/d in May and June spread out among several countries, along with a 450,000 b/d increase in July, also coming from several countries.
It appears there were two key factors driving the decision. The prospects for continued strong demand were encapsulated in a statement at the start of the OPEC teleconference by Saudi Energy Minister Prince Abdulaziz bin Salman. He was quoted as saying that “even in those sectors that were badly hit such as airline travel, there are signs of meaningful improvement.”
Also on the demand front: The “product supplied” figure in the weekly U.S. Energy Information Administration statistical report stood at 20.31 million b/d for last week, according to the report issued Wednesday. That is just the third time this year that product supplied, which is seen as a proxy for demand, exceeded 20 million b/d. And for the third week of March, it was higher than four of the last five pre-pandemic years.
But bin Salman also was cautious, according to media reports: “The reality remains that the global picture is far from even, and the recovery is far from complete,” he said.
The other notable factor at the meeting was the involvement of the Biden administration. For years, U.S. governments stayed as far away as they could — at least publicly — from OPEC. That began to shift in the latter years of the Clinton administration, when then-Energy Secretary Bill Richardson openly urged OPEC to increase production when prices were rising in 2000. He also attended a meeting of consumers and producers in Saudi Arabia to make the same point, an unusual step for a U.S. government representative.
More recently, President Donald Trump often tweeted his displeasure at OPEC at what he saw as insufficient production coming from the group, a view that took a 180-degree turn at the start of the pandemic when he urged the group to reduce output to avoid further carnage in the U.S. oil and gas sector.
This time around, U.S. Secretary of Energy Jennifer Granholm spoke with the Saudi energy minister prior to the meeting. According to her Twitter feed, Granholm spoke about “international cooperation to ensure affordable and reliable sources of energy for consumers.”
Whether the market needs the additional oil is not certain. Two sides of that question can be found in last month’s report from the International Energy Agency.
Its supply/demand table and its closely watched “OPEC call” number suggests a significant need for more production. The OPEC call number is produced by taking estimated future global demand, subtracting estimated non-OPEC production, submitting natural gas liquids production estimates from OPEC and what’s left is a number that OPEC needs to produce to keep markets balanced.
In the third quarter of this year, that call is estimated at 27.9 million b/d. In the fourth quarter, it’s 29.3 million b/d. But the latest estimate on OPEC production from S&P Global Platts, for February, was 24.86 million b/d, suggesting more output is needed from either OPEC or non-OPEC sources, or a combination of the two.
But at the same time, the IEA sees plenty of oil in storage worldwide. “Oil inventories still look ample compared with historical levels despite a steady decline from a massive overhang that piled up during 2Q20,” the report said. “By the end of January, OECD industry stocks, at 3,023 million barrels were still 110 mb higher than a year ago, at the onset of the COVID crisis.”