OPEC+ surprised markets in April with plans to increase production by 2.14mn b/d by July, a dramatic reversal from just one month earlier when caution prevailed and production was left unchanged. The official press release from OPEC cited improved conditions for a return in oil consumption in the summer months after previously erring on the side of caution as rising infection rates and slow vaccination roll-outs clouded the outlook for a strong recovery. The approval of additional stimulus in the US and continued declines in oil stocks along with improved vaccination uptake globally look to have given OPEC+ enough confidence to move production higher in the coming months. A large portion of the additional production will be made up of a return of Saudi Arabia’s extra 1mnb/d production cut. OPEC’s top producer will ramp up by 250,000b/d in May, 350,000b/d in June and 400,000b/d in July. The OPEC+ collective will lower curtailment by increasing output by 350,000b/d in May, 350,000b/d in June and 441,000b/d in July bringing the remaining total cuts to 5.8mnb/d. This would level curtailment levels about 0.6mnb/d above the 5.2mnb/d target, which was originally set for the start of 2021.
High conformity by the group to existing production cuts, reaching 115% of target in February, is expected to remain broadly consistent across this period. Oil prices have mostly held steady since the announcement with the market taking a neutral view. The contrasting news of increased OPEC+ confidence in strong recovery against increased supply has kept sentiment broadly even.
As a result of the OPEC production increase, we have revised our forecasts to account for further reductions in cuts throughout 2021 and across all of 2022 – beyond expiry of the current deal in April 2022. In our core scenario, OPEC+ will continue to gradually ramp up production by reducing the production cut levels gradually. We expect the cuts to slowly reduce to zero by the end of 2022. This would entail the production curtailment going beyond the current expiry target of April 2022. In our view, the production cut level will be significantly lower than the original 5.2mnb/d target for April, at 2.7mnb/d. The main factors that we believe that would mandate lower cuts are near-term demand growth peaking in 2021 and the rise in non-OPEC+ production into 2023. If OPEC+ wait too long to return the proposed 5.2mnb/d post-April 2022, the market will have less of an ability to absorb additional production given the slower growth in demand we expect and the rise of additional output from non-OPEC+ sources and other OPEC exempt countries, Iran and Libya. Having a substantially lower volume of barrels to bring back to the market post April 2022 would have less of an impact on the supply balance and keep fundamentals broadly supportive of higher prices. However, if non-OPEC+ barrels return at an accelerated pace there may be little scope to increase OPEC+ production without deterioration of prices as fundamentals flip to oversupply. Compounding the timing of additional supply, we forecast demand growth in 2023 to fall, to back to trend of approximately 1mnb/d of new demand. Given this outlook 2023 looks to be significantly oversupplied.
Lingering uncertainty around global oil demand and OPEC’s monthly assessment and flexibility pose significant risks to our updated production forecasts. However, recent high frequency data point to solidifying demand outlook of higher consumption. Despite the optimistic assessment for demand in H2 2021, OPEC+ cautioned that vigilance would be required given oil’s recent bouts of price volatility. Future easing of production cuts will remain highly dependent on the wider macroeconomic recovery and related consumption of oil. If the recovery were to stall, we would expect the group to pause any production increases. The abundance of caution however, could see the limited window for significant production increases narrow as demand growth is expected to slow in 2022, giving more room from competing producers to bring new production online at today’s improved oil prices. Our country risk team sees global growth signaling a continuing recovery across 2021 despite recent setbacks due to rising infection rates and related lockdown measures. Global Purchasing Manager Index (PMI) figures should the bulk of economies expected to remain in expansionary territory. Developed markets are leading the pack, with PMI figures showing the highest scores and dragging the global average higher despite the slightly lower expectation from emerging market respondents.
It is clear from volumes available for production from OPEC+ even the best-case surge in demand could be comfortably met in 2021 though 2022 may pose some issues with non-OPEC+ producer bringing addition barrels to market. In our view OPEC will continue to be in control of the supply but the lingering uncertainty in demand will warrant vigilance and monthly meeting communiques will hold significant influence over markets and sentiment.