After Wednesday's JMMC meeting ended without reaching a recommendation (as is customary and expected), the key decision-making OPEC+ meeting - where ministers will hammer out May’s output quotas - begins at 1pm London Time. As Newsquawk notes, market expectations are skewed towards an extension of current cuts, but a clear stance from Saudi - who have a tendency to surprise in recent months - remains to be seen, namely on the decision regarding the extra 1MM barrels the Kingdom has kept offline since the start of the year.
Commenting on today's key event, Bloomberg's Jake Lloyd-Smith reminds us that Saudi Arabia has sprung some big surprises in the oil market already this year, and may do so again today as OPEC+ grapples with a thorny decision on supply. That could make for a volatile session before the long weekend, and already has with oil whipsawing from gains to losses in jittery trading, amid market rumors that OPEC+ is i) considering a return to phased monthly oil-output hikes and ii) is also considering maintaining current cuts, according to a delegate... which pretty much covers every base so is completely useless.
As such, while the consensus view is the grouping will stick with deep output curbs to safeguard crude’s recovery, there’s an outside chance of alternative outcomes. These span the twin extremes, from releasing barrels to tightening further.
At issue is the varied recovery across key regions. For every rosy demand metric from the U.S. or China, there’s a poor one from Europe as lockdowns make a comeback. In addition, Riyadh faces a headache from rival Iran, which has been pushing clandestine barrels into China despite U.S. sanctions. This year, Riyadh has cultivated a reputation for surprises, from a unilateral output cut in January to presiding over the OPEC+ decision in March to keep curbs when the market expected an easing. While today’s decision may follow the script for a rollover, traders will be on alert for different story lines.
A quick recap of notable highlights into the meeting, courtesy of Newsquawk:
- Recent Rhetoric: As a reminder, the prior meeting saw an unexpected rollover of February/March output quotas (Russia and Kazakhstan were allowed incremental increases for domestic demand), with the most notable aspect being Saudi’s surprise extension of its unilateral cut. The most recent source reports suggested that expectations are growing over another rollover of current curbs into May. The reason for the cautious approach reportedly includes fresh lockdowns around the world alongside rising Iranian oil exports.
- Saudi Arabia: Some sources suggested that Saudi Arabia is reportedly ready to support an OPEC+ oil cut extension into May and June, while it is also ready to extend its voluntary cut as it sees global demand as not yet strong enough to bring back additional supply. However, when a Saudi source was asked about these reports, the response was “we haven’t even started consultations yet”, according to Energy Intel.
- Russia: Moscow is said to have voiced support for a rollover of the April deal (i.e. with a small increase for itself) into May, according to a source. Russian Deputy PM Novak in early March highlighted concern over the non-OPEC competition.
- COVID: Since the last meeting, the COVID situation in the Euro Zone has continued to deteriorate with further lockdown measures imposed across the region. OPEC, alongside other energy agencies, has previously voiced concern over the fragility of OECD demand. “While some of the improving momentum is assumed to carry over into 2021, another round of lockdowns and social distancing measures in some key OECD economies is likely to dampen 1Q21 momentum.”, said OPEC in its March MOMR – subsequently France, Germany and the Netherlands announced tighter COVID restrictions. It is also worth noting that OPEC’s base case is that COVID-19 will largely be contained at the beginning of H2 2021, with most major economies vaccinated by then, albeit the inoculation drive in the Euro Zone has been slower than some had hoped.
- Iran: Iran’s oil activities continue to pose a tail risk for OPEC as the country is currently exempt from production quotas amid US sanctions. Iran made a notable strategic shift for its oil exports as it is now attempting to funnel crude via the Gulf of Oman rather than the Persian Gulf, with the former connected to a pipeline capable of delivering 1mln BPD of crude. Furthermore, Tehran signed a 25yr trade deal with Beijing in a pact that could result in increased oil flows from Iran to China. Back to US sanctions, recent reports via Politico suggested that Washington is said to be attempting to break the deadlock with Iran via a new proposal which would include some sanctions relief for Tehran in return for half of some nuclear activities. The source stressed that details are still being worked out.
- Geopolitics: Tensions in the Middle East persists. Saudi oil facilities remain under threat of attack from Iranian-backed Houthis and the Kingdom has also started naval exercises to defend its facilities. Recent reports have also suggested that Saudi had requested more help from the US to defend its oil infrastructure, underscoring the Kingdom’s concerns. Saudi last week announced a new peace plan to end the Yemeni war, however, Houthis dismissed the proposals as “nothing new”.
- NOPEC: Last week, US Senator Grassley (R-Iowa) reintroduced the bipartisan “No Oil Producing and Exporting Cartels” Act (NOPEC), which made its debut during former President Trump’s tenure and permits the US government to take action against “price-fixing by OPEC”. US Senators suggest OPEC’s coordinated manipulation drives up costs for Americans throughout the economic fallout of the pandemic. “NOPEC would explicitly authorize the Justice Department to bring lawsuits against oil cartel members for antitrust violations”. Although this is unlikely to sway producers at the upcoming meeting, it is one to keep on the radar for influence on future decisions.
- Suez Canal: The Ever Given container ship has now been re-floated after blocking the global trade choke point in Egypt for almost a week. The Suez Canal provides the shortest link between Europe and Asia and sees about 12% of global trade move through it. Authorities have stated the backlog of ships will take around three-to-four days from Monday to clear. The temporary fallout from the blockade is unlikely to be much of an influence on OPEC’s decision as COVID remains their implied mandate.
Citi has called on OPEC+ to again extend the current cuts or even cut deeper to keep a floor under prices. Although, the latter would be easier said than done as OPEC+ unanimity is needed to roll out policy. Members are tempted to raise output amid the high-price environment, whilst some also recently voiced concern over market share loss to the US.
Goldman Sachs expects OPEC+ to keep production for May unchanged at the upcoming meeting. The bank views the recent fall in oil prices as overshooting the shifts in oil fundamentals. “In particular, we expect a slower ramp-up in OPEC+ production this spring to help offset both slower EM and EU demand recovery and higher Iranian exports, with global demand still set to increase sharply through the summer.”, the bank says.
ING has also aligned itself with market expectations; “The weakness in the physical and paper market since the OPEC+ meeting earlier in the month could push the group to roll over the current cuts when it meets next on 1 April.” The bank suggests that if we do see any easing in cuts, it is likely to be very modest, but OPEC+ would want to avoid a sell-off in prices.