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Breaking Down What to Expect From Tomorrow's OPEC+ Meeting
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A monthly gathering of the world’s major oil producers is likely to see the group further ease production cuts from August, 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 tomorrow via videoconference to decide the next course of their oil production policy.
OPEC+ Keeps Supply in Check
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.
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.
Over the past two meetings, the group stuck to 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 the negative territory to more than $70 now, recently hitting a multi-year high of $74.05.
Demand Coming Back Faster Than Expected
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. Uncertainty over the potential revival of more Iranian exports, 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, demand is set to surpass the pre-pandemic threshold of 100 million barrels per day once again next year, especially with most individuals resuming activities post vaccination and pent-up consumption starting to take effect. The upbeat demand picture has boosted the OPEC+ group’s 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 summer travel season underway, the record storage glut from 2020 is likely to be eliminated soon and supplies will fall rapidly in this year’s second half.
A Helping Hand in Shale’s Disciplined Approach
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 that 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 rise in the price.
Yet, this time the companies seem to be in no hurry to boost output. Finally, learning their lesson, the shale operators are primarily focusing on improving cost and increasing free cash flow rather than looking at boosting production. While oil at over $70 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.
According to weekly data provided by Houston-based Baker Hughes (BKR - Free Report) , the last time WTI crude traded at these levels, more than 850 oil rigs were operating. Now, it’s just 372 — a proof of wariness on the part of the producers to raise production too quickly.
The Cartel Takes Center Stage
Last week, oil prices hit their highest in 32 months as investors focus on the improving fundamentals in the energy market. Crude supplies declined to the pre-lockdown levels, with U.S. commercial stockpiles down by nearly 9% since mid-March. Further, taking Cushing as an indicator, the oil market has already tightened considerably. Stocks fell to just 41.7 million barrels at the key storage hub last week, the lowest since March 2020. There was also an improvement in gasoline demand on the back of rebounding road and airline travel even as U.S. shale producers stuck to austerity. This bodes well for oil prices in the second half of 2021.
The tightening demand-supply outlook means that OPEC+ will most likely choose to boost output by a modest 500,000 barrels a day starting in August. With the International Energy Agency’s (“IEA”) assertion that “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” the group might be reasonably confident about the trajectory of demand, which should be enough to absorb the additional crude.
E&P Stocks in Limelight
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 - Free Report) , Diamondback Energy (FANG - Free Report) , Occidental Petroleum (OXY - Free Report) , Devon Energy (DVN - Free Report) , EOG Resources (EOG - Free Report) and Zacks Rank of #1 (Strong Buy) Hess Corporation (HES - Free Report) . These are some of the best-performing S&P 500 energy stocks so far this year. Marathon Oil is up 99.85% in the year-to-date period, followed by Diamondback (91.36%), Occidental (80.82%), Devon (80.02%), EOG (65.05%) and Hess (63.27%).
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Breaking Down What to Expect From Tomorrow's OPEC+ Meeting
A monthly gathering of the world’s major oil producers is likely to see the group further ease production cuts from August, 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 tomorrow via videoconference to decide the next course of their oil production policy.
OPEC+ Keeps Supply in Check
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.
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.
Over the past two meetings, the group stuck to 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 the negative territory to more than $70 now, recently hitting a multi-year high of $74.05.
Demand Coming Back Faster Than Expected
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. Uncertainty over the potential revival of more Iranian exports, 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, demand is set to surpass the pre-pandemic threshold of 100 million barrels per day once again next year, especially with most individuals resuming activities post vaccination and pent-up consumption starting to take effect. The upbeat demand picture has boosted the OPEC+ group’s 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 summer travel season underway, the record storage glut from 2020 is likely to be eliminated soon and supplies will fall rapidly in this year’s second half.
A Helping Hand in Shale’s Disciplined Approach
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 that 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 rise in the price.
Yet, this time the companies seem to be in no hurry to boost output. Finally, learning their lesson, the shale operators are primarily focusing on improving cost and increasing free cash flow rather than looking at boosting production. While oil at over $70 is profitable for almost all shale entities, the industry, for its part, is sticking to the mantra of capital discipline and sustainable production.
According to weekly data provided by Houston-based Baker Hughes (BKR - Free Report) , the last time WTI crude traded at these levels, more than 850 oil rigs were operating. Now, it’s just 372 — a proof of wariness on the part of the producers to raise production too quickly.
The Cartel Takes Center Stage
Last week, oil prices hit their highest in 32 months as investors focus on the improving fundamentals in the energy market. Crude supplies declined to the pre-lockdown levels, with U.S. commercial stockpiles down by nearly 9% since mid-March. Further, taking Cushing as an indicator, the oil market has already tightened considerably. Stocks fell to just 41.7 million barrels at the key storage hub last week, the lowest since March 2020. There was also an improvement in gasoline demand on the back of rebounding road and airline travel even as U.S. shale producers stuck to austerity. This bodes well for oil prices in the second half of 2021.
The tightening demand-supply outlook means that OPEC+ will most likely choose to boost output by a modest 500,000 barrels a day starting in August. With the International Energy Agency’s (“IEA”) assertion that “OPEC+ needs to open the taps to keep the world oil markets adequately supplied,” the group might be reasonably confident about the trajectory of demand, which should be enough to absorb the additional crude.
E&P Stocks in Limelight
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 - Free Report) , Diamondback Energy (FANG - Free Report) , Occidental Petroleum (OXY - Free Report) , Devon Energy (DVN - Free Report) , EOG Resources (EOG - Free Report) and Zacks Rank of #1 (Strong Buy) Hess Corporation (HES - Free Report) . These are some of the best-performing S&P 500 energy stocks so far this year. Marathon Oil is up 99.85% in the year-to-date period, followed by Diamondback (91.36%), Occidental (80.82%), Devon (80.02%), EOG (65.05%) and Hess (63.27%).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Bitcoin, Like the Internet Itself, Could Change Everything
Blockchain and cryptocurrency has sparked one of the most exciting discussion topics of a generation. Some call it the “Internet of Money” and predict it could change the way money works forever. If true, it could do to banks what Netflix did to Blockbuster and Amazon did to Sears. Experts agree we’re still in the early stages of this technology, and as it grows, it will create several investing opportunities.
Zacks’ has just revealed 3 companies that can help investors capitalize on the explosive profit potential of Bitcoin and the other cryptocurrencies with significantly less volatility than buying them directly.
See 3 crypto-related stocks now >>