POLAND – 2021/01/05: In this photo illustration, an OPEC logo seen displayed on a smartphone with … [+]
OPEC+, which is comprised of oil-producing countries, ministers from the Organization of the Petroleum Exporting Countries (OPEC) and their allies, including Russia and Kazakhstan, will be making another landmark decision about oil supply today. Market players are watching the situation very closely, and hoping that the cartel acknowledges the coronavirus vaccine-related challenges. The hope is that OPEC+ won’t increase the oil supply prematurely.
Why Were Oil Production Cuts Made?
OPEC+ introduced oil production cuts in order to restore oil prices which crashed after coronavirus and brought the global economy to a standstill last year. Oil futures dropped into negative territory for the first time in history. As a result, collective action was taken by OPEC+ to cut oil production.
How Much Oil Supply Is Out of Market?
The cartel is keeping nearly 7 million barrels per day (bpd) out of the market in order to support prices and prevent an oil supply glut. However, the recovery in oil prices during the past few quarters has made US crude oil producers ramp up their oil production. Having said that, Saudi Arabia, the largest oil producer in OPEC+, hasn’t shown any concerns about this for the time being.
Are There Still Threats For The Oil Markets?
We are certainly not out of the woods yet. It is true that phenomenal progress has been made on the coronavirus vaccine front, and lawmakers are trying their best to get their nations’ coronavirus vaccine shots rolled out at the earliest chance. However, there have been several hurdles in relation to coronavirus. Efficacy issues and new strains of coronavirus have made the vaccine process more of challenge.
Yesterday, France, the second-biggest economy of the Eurozone, went back into lockdown as coronavirus numbers have started to spike again. This is the third time that we have witnessed this in France. Emanuel Macron, the French President, has made it absolutely clear that he is serious about the lockdown measures, as even schools will not open for another three weeks. All of this undermines the coronavirus-related economic recovery, and it adversely influences oil demand.
Curbing of Oil Demand
OPEC+ recently curbed its oil demand for this year by 300K bpd as the cartel knows that the recovery isn’t as smooth as they previously anticipated. Bringing the demand curve lower gives us a reasonable indication of OPEC+’s thinking and their upcoming decision, which is that the cartel isn’t likely to move a muscle.
Clues About OPEC+’s Decision
The Joint Technical Committee, which advises the group of oil-producing countries, did not make any formal recommendation to OPEC+ yesterday. So, although OPEC+ has lowered its oil demand, the jury is still out regarding the decision. Usually, under stressful times, the committee makes a formal recommendation before the event, and market players take a note of this. But, this time, we do not have such clues.
The only hint regarding this meeting can be taken from Saudi Arabia’s stance, which is in no rush to increase oil production anytime soon. The likely chances are that we may not see any significant change in the OPEC+ decision.
Oil Reaction Expectation
If OPEC+ doesn’t increase the oil supply significantly, and the changes remain in line with the previous meeting, where only a small increment was allowed, then we could see the oil price moving higher. Crude and Brent could see their prices soar by approximately $3 dollars.
