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Analytics, 02 April 2021

Why oil prices rallied after the OPEC+ meeting?

The Oil price rallied after OPEC+ decided to gradually raise crude production from May through July, in a deal where Saudi Arabia will also rollback its voluntary cuts during the three months. However, analysts believe the OPEC decision is a risky move amidst the uncertainty in oil demand.

OPEC+ Meeting

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. Saudi Arabia will gradually roll back that voluntary cut, which it announced at the January meeting. This 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. Essentially, this means the Saudis would essentially stop their voluntary cut in July.

The Saudi’s move to add more oil is a key takeaway from the meeting, especially after months of restraining production.

Analysts believe the new deal is supportive of oil prices and should also help avoid a sharp spike upward as oil demand picks up. Analysts forecast a strong recovery in oil demand by the third quarter for the U.S. and expect total global oil demand to gain 6.2 million barrel per day year on year in 2021.

What is oil price today?

On Thursday, May West Texas Intermediate crude added $2.29, or 3.9%, to settle at $61.45 a barrel, after touching a fresh intraday high at $61.75 following the OPEC+ announcement. Meanwhile, June Brent crude tacked on $2.12, or 3.4%, to end at $64.86 a barrel on ICE Futures Europe.

Outlook of the oil market

During the meeting, 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 meeting comes shortly after the Suez Canal reopened to traffic. Oil price rebounded in the week that the large container ship ran aground in the Suez Canal, due to concerns that a blockage of the vital shipping route for weeks would squeeze supplies.

The decision to cut production indicates that the many oil producers had exhausted their patience and were not willing to accept that some countries — and mainly Russia — were allowed to constantly hike their production while others kept it flat.

The bottom line is that the oil market is getting another nearly 2 million barrels per day over the next three months. The production was always going to be cut, but perhaps not sooner than the market expected. Saudi Arabia warned that OPEC and allies including Russia earlier in the day that crude’s recovery was “far from complete” with the pandemic still wreaking havoc globally. Consumer countries are also watching the actions of OPEC+ carefully, with those such as India wary about producers keeping too tight a hold on output that will only propel a surge in prices.

OPEC+ will hold its next meeting on April 28.

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