Commodities Corner: Why oil prices rallied after OPEC+ said it will gradually raise production

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The decision by the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, to gradually raise crude production from May through July led to a somewhat surprising rally in oil prices Thursday.

Saudi Arabia will also rollback its voluntary cuts during the three-month period.

The OPEC+ decision “appears to be a risky move amidst the uncertainty in oil demand,” said Manish Raj, chief financial officer at Velandera Energy. “The market is cheering, nonetheless, since there is a clear path through July, and today’s agreement eliminates the uncertainty of month to month output calibrations that have been in place since December.”

During a press conference, Saudi Arabia’s Minister of Energy Prince Abdulaziz bin Salman said OPEC+ will raise daily oil production by 350,000 barrels in May, 350,000 barrels in June and by 441,000 barrels in July.

OPEC+ was holding back roughly 8 million barrels a day of output, 1 million of which represented a voluntary cut by Saudi Arabia.

However, Prince Abdulaziz also said Saudi Arabia will gradually roll back that voluntary cut, which it announced at the January meeting. It will ease the per-day reduction by 250,000 barrels in May, by 350,000 barrels in June and by 400,000 barrels in July. That means the Saudis would essentially stop their voluntary cut in July.

“The agreement is supportive of oil prices, yet should also help avoid a sharp spike upward as oil demand picks up,” said Ann-Louise Hittle, Wood Mackenzie’s vice president, Macro Oils, in emailed commentary.

Wood Mackenzie forecasts a “strong recovery in oil demand by the third quarter for the U.S.” and expects total global oil demand to gain 6.2 million barrel per day year on year in 2021, she said.

The Saudi’s move to add more oil is a “key takeaway” from the meeting, said Peter McNally, global sector lead for industrial, materials and energy at Third Bridge. “After months of restraining production, Saudi Arabia will gradually add barrels back, although this will be offset by compensation barrels from other members.

OPEC+ extended the amount of time countries have to make up for production above their quotas to the end of September.

The group will also continue to assess oil market conditions monthly, and decide on whether to adjust production, up or down, for the following month by no more than 500,000 barrels per day.

The production decision “shows that patience was exhausted among many producers, who could not accept that some countries — and mainly Russia — was allowed to constantly hike their production while others kept it flat,” said Louise Dickson, oil markets analyst at Rystad Energy.

“The output rise is not likely to be detrimental, especially for June and July as demand will likely also rise, and that is reflected in the market reaction, which is not a panic one to slash price levels,” she said in emailed commentary.


“The output rise is not likely to be detrimental, especially for June and July as demand will likely also rise…”


— Louise Dickson, Rystad Energy

On Thursday, May West Texas Intermediate crude
CLK21,
+3.74%

CL.1,
+3.74%

added $2.29, or 3.9%, to settle at $61.45 a barrel on the New York Mercantile Exchange, after touching a fresh intraday high at $61.75 following the OPEC+ announcement.

June Brent crude
BRNM21,
-0.17%

BRN00,
-0.17%

tacked on $2.12, or 3.4%, to end at $64.86 a barrel on ICE Futures Europe.

“The bottom line is that the oil market is getting another nearly 2 million barrels per day over the next three months,” said Dickson. “We always knew these barrels would return eventually, the question now is if they are coming too early versus what the market can digest.”

OPEC+ will hold its next meeting on April 28.

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