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OPEC stuns by opting not to raise output

Posted - March 5, 2021

Coverage of the OPEC+ group’s decision Thursday to not increase crude production even after a more than $45 increase in prices since April inevitably featured one of two words: “shocking” or “stunning.”

Diesel markets may have played a role in the path that OPEC took.

Expectations going into the meeting were that OPEC, led by Saudi Arabia, would decide along with the OPEC+ group to put more barrels onto the market. The most closely watched models on global supply and demand all show demand outstripping supply now, a situation that all agreed was necessary to bring global crude inventories down to a more normal level. The question was how far it needed to go.

Singapore-based analyst Vandana Hari, writing in VandaInsights, said OPEC+ “had been widely expected to boost supply by 1.0-1.5 million b/d.” Instead, the number was zero.

The supply/demand models show the current imbalance blowing out by the third quarter of the year, which begins in less than three months. Since any restoration of reduced production wouldn’t start until April anyway, getting ready for that third quarter would need to begin in the second quarter to ramp up in time to put more barrels onto the market.

In an interview with Bloomberg Television, Amrita Sen, the chief oil analyst at Energy Aspects, said of the decision that “there is some risk of overtightening.

“Saudi Arabia needs to start talking about how they will bring back the barrels in the third quarter,” she said.

The decision to do nothing caught oil markets by surprise. The price of West Texas Intermediate crude rose $2.55/barrel Thursday, a gain of 2.56%, to settle at $63.83. The lowest settlement for WTI since the pandemic began was $11.57/b on April 21, meaning that the Thursday price, which is the post-pandemic high, marks an increase of more than 550%. (The widely reported negative price on WTI from April was not a settlement price but recorded in intraday trades.) Not only is Thursday’s settlement a post-pandemic high, it is the highest settlement since April 25, 2019.


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