Did OPEC+ April fool the oil market?

Before the April 1st meeting of OPEC members, the consensus was that OPEC+ would roll over cuts. This was clearly because last month’s rollover was the right decision, as Saudi Arabia said the group’s cautious approach had brought dividends.

When the market corrected last month, limited supply gave prices the support it needed. In an event where production cuts were eased last month, oil prices would have declined further than what we witnessed.

However, the group decided to increase output albeit gradually. The increase in output is an optimistic decision that there will be an increase in demand. The demand recovery will begin this summer as vaccines would have been rolled out and accelerated. More people will travel as economies begin to open, hence a return to jet fuel. The decision is clearly a U-turn on their cautious strategy in recent months.

Oil prices follow an “up the stairs,” “down like an elevator” movement. Understandably, OPEC+ understands the sensitivity of the oil markets, so it prepares accordingly. The JMMC technical meetings that precede OPEC policy meetings highlights how much the decision-making process entails. This month, there were no policy recommendations — the first joker card played.

So on Thursday, the 1st of April, when discussions on easing cuts were debated, it appeared as a surprise. The demand for more oil was much lower than it had been before the March meeting.

Nigeria supported a rollover of the cuts. However, there have been question marks on the country’s conformity and honouring its compensation plan, just like Iraq and Kazakhstan—both oil-producing nations who have also submitted their compensation cuts.

The importance of conformity and compensation plans cannot be overstressed, especially as OPEC+’s excess oil production rose to 3 million bpd as reported last week. The extension of the compensation plan till the end of September, which was recommended by JMMC, is to protect the interests of the group.

In addition, the oil ministers of Angola and Oman supported a rollover. The rollover discussed was for the month of May. During the meetings, traders were curious about updates on Saudi’s 1 million voluntary cut and if Russia would ask for another exemption.

During the meeting, Algeria’s minister suggested a two-month rollover which was different from the one-month rollover, plus gradual easing of cuts that the United Arab Emirates supported. Bahrain and Brunei supported a rollover. Kuwait as well. At that point, Saudi Arabia noted the oil ministers who were in agreement with either a one-month rollover or two-month rollover.

Notably, Saudi Arabia’s minister pointed out that as summer approached, there was avenue for domestic demand to rise and the need to gradually increase output in the second half of the year. It was on this premise that sources revealed that Saudi Arabia might ease their voluntary one million cut by May.

According to sources, Saudi proposed: May 350k OPEC+ ease and 250k KSA, June 350k OPEC+ ease and 250k KSA, and July the remainder to reach 5.6m barrels.

Russia agreed with Saudi’s proposal (a very cordial relationship developing between both nations). At this point, it appeared that the group was in support of a gradual increase in output.

Saudi Arabia emphasised the compliance aspect again, as it appeared that some countries were taking advantage of other countries’ cuts.

The group finally reached a consensus on a gradual increase for a 3-month period—the last joker that gave oil traders the poker face.

The easing would be May 350k, June 350k, and July 450k for OPEC+. For Saudi Arabia, it would be May 250K, June 350K, July 400k.

Prior to the meeting, the U.S energy secretary had emphasized that affordable and reliable means of energy should be the priority of Saudi Arabia and its counterparts. However, the Saudi energy minister denied its role in their decision. Perhaps this might have prompted the decision of the group. Debates on Joe Biden’s energy policy ensued afterwards. Analysts claim Joe Biden cared about clean energy and cheaper gasoline, and not the profitability of Shale.

Unity appears to be guiding OPEC’s recent decisions and prices have been stable, unlike last year’s tumultuous crash after the group’s division.