The OPEC+ coalition appears determined to ease the global oil glut and lift the oil prices that had cratered in April because of OPEC+ wrangling and crashing global demand in the pandemic.
Oil prices have rallied since the start of the new OPEC+ cuts. These cuts, along with curtailments in North America, have combined with improved global oil demand and the new notion that the worst of the demand collapse is likely behind us, to instill confidence in the market that it is now heading for a deficit.
The more bullish sentiment, however, raises another question—will producers be tempted by rising crude oil prices to disregard quotas within OPEC+? Will U.S. shale resume drilling activity sooner than the market needs it?
OPEC and its partners in the pact realized early last month that they had underestimated what turned out to be a devastating impact of COVID-19 on global demand. With oil revenues for petro states crashing as oil demand and oil prices collapsed, OPEC’s leader Saudi Arabia and all other producers in the OPEC+ group soon realized that they need to quickly force the market into balance to save their oil-dependent economies from taking an additional hit on top of the pandemic-related slowdown.
Three weeks into the new OPEC+ deal to cut production, the market sentiment has markedly shifted. When the pact announced the deal on April 12, analysts were saying that these cuts—albeit 10 percent of typical global demand—would be ‘too little too late’ to save the oil market from the abyss.
Now the mood has improved, and so have oil prices. The price of oil is now 80 percent higher than it was in mid-April, and analysts are pointing out that the cuts from OPEC+, combined with economics-driven curtailments in North America to the tune of 4 million bpd, is bringing the oil market closer to deficit in the coming months.
Related: U.S. Shale Cuts Production Deeper And Faster Than Expected
Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, Goldman Sachs said last week.
OPEC+–with huge help from North America’s cuts because of unsustainably low oil prices for its producers–managed to swing the market mood to expectations of a deficit as soon as next month. OPEC and its de facto leader and largest producer, Saudi Arabia, have a track record for purposefully tightening the oil market whenever Saudi Arabia and perhaps a few other major oil producers in the cartel have a strong incentive to see higher oil prices, Reuters analyst John Kemp wrote this week.
This spring, the Saudis had the biggest incentive to reverse the flood-them-all-with-oil policy from March and April—money. With oil prices at $20 or below and demand crashing in the pandemic, the world’s top oil exporter had to save face and its economy.
So far, Saudi Arabia, OPEC, and Russia are declaring unwavering support to market stabilization, promising to go the extra mile to rebalance the market—and to see higher oil prices.
OPEC members and their ten non-OPEC partners have slashed oil exports by a massive 5.96 million bpd for the first 13 days of May compared to April averages, oil-flow tracking company Petro-Logistics said at the end of last week.
Saudi Arabia has pledged an additional 1 million bpd of cuts on top of its promised cuts as part of the OPEC+ deal. Even Iraq, the biggest cheater in all the previous pacts, said that it is committed to the production cuts.
Saudi Arabia and the leader of the non-OPEC countries, Russia, put out a statement last week, saying that they “remain firmly committed to achieving the goal of market stability and expediting the rebalancing of the oil market.”
“We would like to especially commend the efforts of responsible producers around the world who have willingly adjusted their production out of a sense of shared responsibility,” Saudi Energy Minister Prince Abdulaziz bin Salman and Russia’s Energy Minister Alexander Novak said.
For U.S. producers, curtailments have nothing to do with “shared responsibility”—the economics are unfavorable, storage availability is still scarce, and demand is still low. The U.S. shale patch has announced more than 1.5 million bpd in cuts for Q2, lifting the oil prices and market sentiment over the past two weeks. But with prices rising, some producers could be tempted to resume activity, nipping a sustained market recovery in the bud.
“Further strength in the oil market would send the wrong signal to producers, with them likely more reluctant to cut output in a rallying market,” ING strategists Warren Patterson and Wenyu Yao said on Wednesday.