A monthly gathering of the world’s major oil producers is likely to see the group broadly maintain its gradual production increase through July, energy analysts believe. Member countries of the OPEC+ group — a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia — will meet today to decide the next course of their oil production policy.
OPEC’s Tight Rein on Supplies
The alliance, looking to shore up crude prices from the coronavirus-induced depths due to demand destruction, started to withhold output by almost 10 million barrels per day — the largest in history — from May last year. The initial reduction lasted three months. Beginning August, the production cap was relaxed to 7.7 million barrels per day through the remainder of the year. Continuing with its oil price support mechanism, the group agreed to increase output by 500,000 barrels-a-day from January 2021 instead of the pre-scheduled 2 million barrels per day.
On a further positive note and to nearly everyone’s surprise, Riyadh pledged to reduce oil output by 1 million barrels per day in February and March, thereby pumping for two months at levels below the production limit fixed under the OPEC+ agreement. The deeper cuts by the world’s largest oil exporter also helped to offset Russia and Kazakhstan’s combined addition of 75,000 barrels per day to the market, beginning in February and extending through March. In March, the OPEC+ alliance decided to continue withholding production by around 7 million barrels per day (or about 7% of the global consumption) through April. Moreover, OPEC-kingpin Saudi Arabia pledged to extend its voluntary supply curbs of 1 million barrels per day. In April, the group stuck with its previous plans to slightly relax output curbs from May through July. The producer alliance decided to return 2.1 million barrels per day of production (including Saudi Arabia’s unilateral cuts) to the market during this period, easing curtailments to around 6 million barrels per day. It must be mentioned that the existing curbs have been instrumental in lifting a barrel of crude from negative territory to more than $65 now, recently hitting a multi-year high of $66.85. Improving Prospects for Energy Demand
Apart from the OPEC+ cartel’s calibrated production policy, oil’s stunning rebound has been driven by continued vaccine-related developments and their successful deployment around the world, leading to an earlier-than-expected pickup in demand. Easing coronavirus infections in the United States and Europe, the passage of the $1.9-trillion stimulus bill, and signs of robust demand in the world’s second-largest oil consumer, China, are the other positives in the oil story. In particular, much of the bullish argument is simply a bet on stronger economic growth in the Western markets and the subsequent improvement in consumer spending.
In fact, the OPEC+ group has expressed confidence in the commodity’s medium-term outlook. The coalition believes that with restrictions being lifted in most of Europe and the United States, and the onset of the summer travel season, the record storage glut from 2020 is likely to be eliminated soon and supplies will fall rapidly in this year’s second half. The Shale Conundrum
At the same time, the thing one has to remember is that the rise in oil prices might open the door for U.S. shale operators who were forced to dial back production in response to the decimation in demand and prices. In other words, OPEC’s strategy to revive oil markets is dependent on all-round production restraint. The primary risk to this comes from the U.S. shale patch whose constituents are quick to pick up drilling activities on any steep rises in the price. With WTI crude recently reaching levels last seen in 2018, there is already some evidence to suggest that higher prices will push up domestic output. According to weekly data provided by Houston-based
Baker Hughes ( BKR Quick Quote BKR - Free Report) , the oil rig count is now at its highest since April 2020 — an early pointer to rising U.S. volumes in the short term. This could offset the output curbs elsewhere and weigh on the outlook for prices. What Will the Group Do Now?
Oil prices are at their highest since 2018, as investors have been looking past challenges from the COVID-19 resurgence in India and the probability of more Iranian oil coming back to the market and turned their attention to the improving fundamentals in the fuel market with predictions of rising global demand throughout the remainder of 2021. Even the shale operators, learning their lesson, are primarily focusing on improving cost and increasing free cash flow rather than looking at higher production. The tightening demand-supply outlook means that OPEC+ will most likely reaffirm its scheduled production increase through July. The group sees enough demand to absorb the additional crude.
Watch the E&P Space
The volatile oil exploration and production companies will be the most affected by the OPEC meeting’s outcome, as their fortunes are tied to commodity price fluctuation. Energy investors will be closely tracking the S&P components, including the likes of
Marathon Oil ( MRO Quick Quote MRO - Free Report) , Devon Energy ( DVN Quick Quote DVN - Free Report) , Diamondback Energy ( FANG Quick Quote FANG - Free Report) , EOG Resources ( EOG Quick Quote EOG - Free Report) , Hess Corporation ( HES Quick Quote HES - Free Report) and Occidental Petroleum ( OXY Quick Quote OXY - Free Report) . These are some of the best-performing S&P 500 energy stocks so far this year. Marathon Oil is up 81.56% in the year-to-date period, followed by Devon (69.30%), Diamondback (65.43%), EOG (61.10%), Hess (58.78%), Occidental (49.97%) and APA (46.58%) — all carrying a Zacks Rank #3 (Hold). You can see . the complete list of today’s Zacks #1 Rank stocks here Time to Invest in Legal Marijuana
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