Barrel Growth: How OPEC’s Decision + to Increase Oil Production Will Affect the Market

The OPEC + decision on a gradual increase in current production quotas gave the market certainty for the near future and will strengthen quotes at $ 60-65 per barrel, according to experts interviewed by Izvestia. At a meeting on April 1, the cartel countries agreed on an increase in oil production from May by 350 thousand barrels per day, from June – by another 350 thousand, from July – by an additional 450 thousand. On this news, quotations of black gold showed an increase of 3.5%, reaching $ 64.9 per barrel. During the meeting, Deputy Prime Minister of the Russian Federation Alexander Novak stated the need to prevent neither overheating of the market, nor an overabundance of oil. Today’s decision to moderately increase production could stabilize the market, analysts say.

Moderate increase

The OPEC + countries decided on April 1 to gradually increase oil production. Production will increase by 1.15 million barrels per day in three months: 350 thousand in May and June and another 450 thousand in July.

– The market has received certainty for the near future. At the same time, the oil cartel raised quotas less than expected, such a moderate increase led to a slight increase in prices for black gold. If OPEC + will generally comply with quotas, then this will stabilize the market and strengthen oil quotes at $ 60-65 per barrel– said the head of the IAC Alpari, Alexander Razuvaev, to Izvestia.

During the meeting of the cartel, Russian Deputy Prime Minister Alexander Novak said: although there are still many uncertainties in the oil market due to the COVID-19 pandemic, the overall situation has improved… He noted that the market deficit is 2 million barrels per day, and world stocks are declining. This year, oil demand will grow by 5-5.5 million barrels per day, the Deputy Prime Minister expects.

“We also see that the economy continues to recover, and leading economists expect more than 5% growth in the global economy this year, which, in turn, will have a positive effect on the growth of oil demand,” he said.

According to Alexander Novak, OPEC + needs to monitor the market so as not to allow it to overheat or an excess of oil…

Quotes of black gold in anticipation of the cartel’s decision showed high volatility, and after its announcement showed growth. On April 1 at 7:05 am Moscow time, June Brent futures traded at $ 62.88 per barrel. At 18:15, black gold fell to $ 62.15 per barrel. After the announcement of the OPEC + decision, by 19:30 Moscow time, quotations showed an increase to $ 63.88, and by 21:00 Moscow time they rose to $ 64.9 per barrel, according to trading data from the London ICE exchange.

The market situation is gradually improving as the number of vaccinated people increases and the likelihood of the restrictions being lifted in the second half of the year increases, Director General of Univer Capital Askhat Sagdiev told Izvestia.

Economic recovery in China and the US has increased the demand for fuelAt the same time, OPEC + production has not changed this year, and Saudi Arabia has voluntarily reduced production by another 1 million barrels, said Oleg Bogdanov, a leading analyst at QBF. Therefore, in the first quarter of 2021, oil prices rose to $ 70, he said.

Conservation of risks

One of the most important factors to curb further growth in demand is the next wave of coronavirus in Europe and lockdowns against the background of a shortage of drugs for mass vaccination, said Andrey Maslov, an analyst at Finam Group. Starting April 3, France will introduce a nationwide lockdown for four weeks. A new wave of the pandemic has already been reported in a number of other EU countries. On April 1, European Commissioner for Health Stella Kyriakides announced that the union countries will receive 107 million doses of vaccines by the end of this week, which is 73 million less than the European Commission had planned.

“Also recently, there has been a significant increase in the incidence in India, where restrictive measures in the state of Maharashtra have recently been strengthened,” said Andrey Maslov.

In early March, OPEC Secretary General Mohammed Barkindo said that the organization maintains its forecast for an increase in global oil demand in 2021 by 5.8 million barrels per day. However, it later became known that the OPEC + technical committee lowered its growth forecast to 5.6 million.

The original OPEC + deal plan was agreed in April 2020, but has been adjusted as the coronavirus spreads around the world. The implication was a gradual recovery in oil production in 2021 after a sharp decline in 2020. Since May 1 last year, the cartel members have reduced oil production by 9.7 million barrels per day for three months compared to October 2018. Further, since August, production has increased, the reduction has already amounted to 7.7 million barrels per day until the end of the year. Due to concerns about the second wave of the spread of coronavirus in January 2021, OPEC + decided that in February and March only Russia and Kazakhstan would be able to increase production of black gold – by 65 thousand and 10 thousand a month, respectively.

Also, due to the uncertainty in the global market in connection with the COVID-19 pandemic in March, OPEC + decided to keep the oil production level until April at the current level. Production growth was again agreed only for Russia (by 130 thousand barrels per day) and for Kazakhstan (by 20 thousand barrels per day). Saudi Arabia has been voluntarily cutting production by 1 million barrels per day since February.

The 2021 budget of Russia includes an oil cut-off price of $ 43.3 per barrel, and the current level of oil quotations makes it possible to direct funds to the Reserve National Welfare Fund, noted Alexander Razuvaev. The probability that the budget will be in surplus by the end of the year is almost 100%, he said.

After the story of the grounded container ship in the Suez Canal, the issue of diversifying supplies was acute, so demand for Russian oil is likely to increase, added the expert. This will support the quotes of the Russian export mixture Urals, the expert concluded.