OPEC+ DEVELOPMENTS: PRODUCTION CONSTRAINTS EASING AS ENERGY DEMAND RECOVERS

OPEC+ DEVELOPMENTS: PRODUCTION CONSTRAINTS EASING AS ENERGY DEMAND RECOVERS

The energy ministers of OPEC and Russia, so-called OPEC+, met on 27 April to review continuing constraints on oil output against a backdrop of more optimistic forecasts for demand rising for the rest of this year and a steady improvement in the global outlook for the next stages of the coronavirus pandemic.

It was broadly agreed that the group would stick to previously agreed plans to ease output restrictions which will see an additional 2.1 million barrels per day (bpd) being released from now until the end of July.  This means that last year’s self-imposed OPEC+ cut of some 8 million bpd will be eased to around 5.8 million bpd.  This will be reviewed again at the next OPEC+ meeting in June.

While there are still considerable uncertainties linked to the pandemic, well-illustrated by the terrible and sudden surge in cases across India over the past month, OPEC’s analysts remain confident that global oil demand will continue to increase for the rest of this year.  OPEC’s April report observed: “As the spread and intensity of the COVID-19 pandemic are expected to subside with the ongoing rollout of vaccination programmes, social distancing requirements and travel limitations are likely to be scaled back, offering increased mobility."

This augurs well for the GCC member states, and particularly for Saudi Arabia and the UAE.  For the former, it will enable the Saudi leadership to abandon its voluntary production cuts that were deemed necessary to restore price stability at a revenue-positive level.  For the latter, this will chime with the UAE’s desire to maximise the value of its oil production assets as swiftly as possible to continue support for the transition away from oil dependency.

For Oman, which is a member of OPEC+ but is not a full member of OPEC, and Kuwait, the combination of easing production constraints and increasing revenues will provide welcome economic relief.  However, some commentators may be concerned that this more fiscally comfortable position may reduce some of the drive towards economic diversification and the energy transition.