OPEC+ alliance affirms crude oil output hike from May, banking on improved demand

OPEC and its allies have the green light to ease back on their production cuts, after ministers April 27 endorsed previously agreed plans to boost crude oil output from May.

The alliance, which intends to pump some 2 million b/d more crude oil by July, largely from Saudi Arabia, is betting that improvements in the global economy will outweigh the surge of coronavirus cases in India, Brazil, and Japan.

For now, rosier demand forecasts and robust vaccination programs in the US, UK, and other countries are enough to give OPEC+ members confidence that a production increase will not tank prices.

"In the market, we see some optimism and positive dynamics in the indicators of population mobility and the recovery in demand from the largest consumer countries," Russian Deputy Prime Minister Alexander Novak said in his opening remarks to a key OPEC+ monitoring committee, which met prior to a teleconference with all ministers. "At the same time, we must closely monitor the situation and the spread of the coronavirus that is taking place, especially in some countries of the Asian region."

Kuwaiti oil minister Mohammed al-Fares said before the meeting that the oil market was "witnessing a tangible improvement in the rates of demand with the distribution of vaccines and the continuation of stimulus policies by major global economies," according to state news agency Kuna.

Significant drawdowns in global oil inventories in the last several months have also helped, although the alliance noted in its post-meeting communique that commercial OECD stocks increased by 14.4 million barrels in March and stood 77.4 million barrels above the targeted 2015-2019 average.

Ministers will convene online again June 1 to review their decision.

UNWINDING CUTS

The 23-country alliance, which controls roughly half of world oil production capacity, had committed to holding about 8 million b/d of crude off the market in April -- 6.9 million b/d in official OPEC+ cuts and a voluntary additional 1 million b/d cut by Saudi Arabia -- as it attempts to support prices through the uneven pandemic recovery.

In May, OPEC+ production quotas will rise a collective 350,000 b/d, with another 350,000 b/d increase scheduled for June and 441,000 b/d in July.

At the same time, Saudi Arabia will unwind its extra cut by 250,000 b/d in May, 350,000 b/d in June, and 400,000 b/d in July.

Delegates had largely telegraphed the decision in the days leading up to the meeting, although some doubt remained over Saudi Arabia's intentions, given energy minister Prince Abdulaziz bin Salman's oft-stated preference to err on the side of production discipline to protect hard-won price gains.

Prince Abdulaziz, whose comments are typically closely parsed by the market, did not make any public remarks before or after the talks, which delegates said were a rather low-key affair -- held via teleconference instead of video webinar -- in a departure from the last few tension-filled meetings.

In previous gatherings, the minister has heavily pressured countries that have not fully complied with their quotas to compensate for their free-riding by implementing catch-up cuts of equivalent volume to their overproduction.

Those compensation cuts, which total just above 3 million b/d as of the end of February, are still due by September, the post-meeting communique noted.

PRICE STABILITY

Traders largely took the announcement in stride, with crude futures holding onto overnight gains. Platts had assessed Dated Brent at $65.56/b April 26, with the benchmark having settled in the mid-$60s/b over the last two weeks.

The OPEC+ decision "reflects the likelihood of a substantial demand uplift beginning in May," said Paul Sheldon, chief geopolitical adviser for Platts Analytics. "However, a bullish surprise could still materialize at subsequent meetings, given lingering [coronavirus] uncertainty and the potential for Saudi Arabia to delay the full return of its extra 1 million b/d cut."

Novak told the Rossiya 24 television network that OPEC+ countries were pleased to have steadied the market.

"We hope such a stable situation will be until the end of the year," Novak said. "We will closely monitor the situation and ensure that supply and demand are balanced."