Despite the re-emerging Covid 19 crisis in India, oil prices maintained momentum even as OPEC+ has decided to go ahead with previously agreed production hike plans.
Oil prices have been surprisingly steady over the past week, despite serious doubts about the state of the demand recovery in India. Saudi Arabia, in particular, is expected to be cautious when it comes to additional production hikes.
The markets have already priced in recovering jet fuel demand
The group is now expected to bring back 350,000 bpd from OPEC+ and 250,000 bpd from Saudi Arabia in May, going up to 2.1 million bpd in July. While the OPEC+ technical committee, or JTC, expressed concerns about rising cases of COVID-19 in India, Japan, OPEC has not changed its demand forecast for the second half of the year, which is currently standing at 5.95 million bpd. The expected recovery in aviation this summer and high electricity demand in the Middle East which leads to more crude-fired power generation may have supported the group’s decision. With many airlines around the world announcing the resumption of international flights, the markets also seem to have already priced in jet fuel demand recovery in the summer.
Furthermore, the current uptick in gasoline demand has boosted the US refinery utilisation factor, which is now approaching the five-year average at 85.3% of total capacity. This week, the US crude oil stocks both commercial and strategic had a saw a tiny increase of 100,000 barrels w/w, and current commercial stocks stand at 493.1 million barrels, close to the five-year average. Next to this, there has been a noticeable decline in the demand for all petroleum products by 1.5 million bpd w/w with the exception of gasoline whose demand rose nearly to pre-pandemic levels at 9.1 million bpd, a level not seen since April 2020. Additionally, crude oil production in the United States remains fixed for a second consecutive week at 11 million bpd while the number of oil rigs declined by only 1 rig in the Permian, the first decline in 2021, leaving the total number at 343 rigs.
Implementation of the NOPEC bill has never been feasible
Another important issue that may be of a concern for OPEC+ is the so-called NOPEC bill, a wildcard that is usually brought up by US lawmakers when crude prices begin to rise. Last week, the Secretary-General of OPEC, Mr. Barkindo, has urged OPEC countries to lobby against the legislation which may put not only their interests but also US interests at risk. It is worth mentioning that the NOPEC bill draft has existed for a long time, yet its implementation has never been feasible. Under President Trump, who was a major critic of OPEC, the NOPEC bill was on the table when prices went above $70 in 2017-2018. Then, when prices collapsed during April 2020 we saw President Trump brokering an OPEC+ deal between Saudi Arabia and Russia, and on top of that giving thanks to OPEC+ for saving the US oil industry.Related: The 5 Most Influential Oil Companies In The World
Concerns of market share as Iran’s production is rebounding
One issue that may influence the group’s decision this week is the current discussion in Vienna between Iran and western powers which is already showing some progress. This can lead to a scenario where Iranian crude will find its way back to the markets. Its official production could therefore increase by more than 1 million bpd on top of its current 2.3 million bpd. Yet, it is important to realise that Iran’s production is already rebounding despite the ongoing US sanctions. Currently, a major part of Iranian exports, 1.2 million bpd, are being sold to China at a discount, in spite of U.S. sanctions.
Whether the group will continue to ramp up production until July remains to be seen. Much will depend on the demand situation in India, and it is expected that the group will review its production policy again next month. This means that we may also see a delay in planned production increases as Saudi Arabia may consider keeping its voluntary cuts in place to prevent another price collapse.
By Yousef Alshammari for Oilprice.com