Commentary on the OPEC + meeting – Economy

On June 1, 2021, OPEC + oil ministers confirmed the increase in world crude oil production by +0.84 million barrels per day from July, as part of the previously proposed plan ( April) to increase supply by +2.1 mbd over the May-July period. Members agreed and the new quotas were set over a conference call that lasted only 30 minutes.

Through the monthly meetings that continue, OPEC wishes to have full flexibility to respond to the following different political scenarios: Iranian oil barrels could come back to the fore as oil demand accelerates by 4-5 mbpd over the next 6 months which would lead to an under-supplied market of -2 mbpd for the rest of the year. Further price increases (to $ 75-90 per barrel) to curb demand.

This OPEC meeting aims once again to support oil prices. The second scenario is considered very likely, but not a sufficient reason to increase oil production. Saudi Energy Minister Prince Abdul-Aziz bin Salman told reporters that “the state of demand has shown clear signs of improvement” and that he will only increase supply if he saw demand strengthening in the spot market. Demand for oil is expected to accelerate from around 95 mbpd today to 100 mbpd by the end of the year. Clearly, the more OPEC delays production increases, the more quickly oil stocks decline and the more the offset increases (which currently generates an annualized return of 10% for Brent).

The market started to anticipate an acceleration in Iranian oil exports from 0.6 to 1 mbd in the second half of the year, as everyone expected the JCPOA deal to be reached in the coming weeks and the sanctions on Iranian exports are lifted. The speculative positioning on oil contracts has therefore been reduced, but we now see that the risk that OPEC is too slow to increase production in a scenario where Iran would not find an agreement in the coming weeks / months. (according to new forecasts, the deal will not be concluded until August) increases considerably. It also explains why oil prices started to rebound and strengthened further after the OPEC meeting.

In addition, OPEC believes that the long-term oil situation remains strong. Last month, markets saw major Western oil companies, due to investor activism, stop funding new oil and gas projects. Therefore, it looks like the oil production of the big Western oil companies will slow down. This allows OPEC members to increase their production by an equal volume and gives them the opportunity to steal market share in a market where they can also dictate price levels. Regarding the OPEC meeting, Prince Abdul-Aziz (of Saudi Arabia) also indicated that long-term oil prices are supported by energy demand from Asia and non-member countries. OECD, which continues to grow, and that most of the talk of a carbon-free global economy (as recently presented by the International Energy Agency, IEA) looks like a sequel to “La la land”. He stressed that emerging countries and non-OECD countries will not experience any economic progress in a carbon-free world; therefore, demand for oil will remain high over the next decades.