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OPEC+ Likely to Extend Production Cuts Today: Here's Why

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·5 min read
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A gathering of the world’s major oil producers is likely to see the group broadly maintaining its production cuts, energy analysts believe. Member countries of the OPEC+ group — a coalition between OPEC countries under kingpin Saudi Arabia and non-members led by Russia — will meet today to decide on the next course of their oil production policy.

OPEC’s Push for Stable Oil Prices

The alliance, looking to shore up crude prices from the coronavirus-induced depths due to demand destruction, started to withhold output by almost 10 million barrels per day — the largest in history — from May last year. The initial reduction lasted for three months. Beginning August, the production cap was relaxed to 7.7 million barrels per day through the remainder of this year. Continuing with its oil price support mechanism, the group agreed to increase output by 500,000 barrels-a-day from January 2021 instead of the pre-scheduled 2 million barrels per day.

On a further positive note and to nearly everyone’s surprise, Riyadh pledged to reduce oil output by 1 million barrels per day in February and March, thereby pumping for two months at levels below the production limit fixed under the OPEC+ agreement. The deeper cuts by the world’s largest oil exporter also helped to offset Russia and Kazakhstan’s combined addition of 75,000 barrels per day to the market, beginning in February and extending through March.

Last month, the OPEC+ alliance decided to continue withholding production by around 7 million barrels per day (or about 7% of the global consumption) through April. Moreover, OPEC-kingpin Saudi Arabia pledged to extend its voluntary supply curbs of 1 million barrels per day.

It must be mentioned that the existing curbs have been instrumental in lifting a barrel of crude from negative territory to around $60 now, in between hitting a nearly two-year high above $66 on Mar 5.

Vaccine Breakthroughs Improve Demand Outlook

Crude has spent much of the past few months trading higher on continued vaccine-related developments and their successful deployment around the world that offers hope for an earlier-than-expected pickup in the commodity’s demand on revival in economic and transport activity. Easing coronavirus infections, signs of robust demand in the world’s second-largest oil consumer, China, and the passage of the $1.9 trillion stimulus bill are the other positives in the oil story.

The Shale Dilemma

At the same time, the thing one has to remember is that the rise in oil prices might open the door for U.S. shale operators who were forced to dial back production in response to the decimation in demand and prices. In other words, OPEC’s strategy to revive oil markets is dependent on all-round production restraint. The primary risk to this comes from the U.S. shale patch whose constituents are quick to pick up drilling activities on any steep rises in the price. With WTI crude recently reaching levels last seen in 2019, there is already some evidence to suggest that higher prices will push up domestic output. According to weekly data provided by Houston-based Baker Hughes BKR, the oil rig count is now at its highest since May 2020 — an early pointer to rising U.S. volumes in the short term. This could offset the output curbs elsewhere and weigh on the outlook for prices.

What Will the Group Do Now?

While oil prices have returned to their pre-pandemic levels and there is confidence in the commodity’s long-term outlook on vaccination success, the cartel will most probably stick to its conservative strategy – more so because a number of European nations have imposed lockdowns of late, aimed at slowing the spread of the third wave of the contagion, which may threaten the rebound in fuel demand. Further, a scare over blood clots related to the use of AstraZeneca’s vaccine saw several countries slow down/temporarily suspend its rollout, which has further clouded the sentiment in the energy market.

As concerns over a resurgent virus and the possibility of more lockdowns continued to rattle producers, the OPEC+ coalition cut its forecast for global oil demand growth in 2021 by 300,000 barrels per day. According to OPEC Secretary-General Mohammad Barkindo’s comments at the group’s Joint Technical Committee (‘JTC’) meeting yesterday, “the environment remains challenging, complex and uncertain.”  

Speculation has it that the OPEC+ group of producers will likely roll over the cuts through the month of May, instead of reviving part of the output. However, analysts believe a small concession might be offered to Russia in return for its support to keep production stable. Saudi Arabia is also expected to hold its own production steady in May, or in other words, carry on with the voluntary 1 million barrel-a-day reduction.

E&P Companies in Focus

The volatile oil exploration and production companies will be the most affected by the OPEC meeting’s outcome, as their fortunes are tied to commodity price fluctuation. Energy investors will be closely tracking the S&P components, including the likes of Marathon Oil MRO, Diamondback Energy FANG, Occidental Petroleum OXY, EOG Resources EOG and Devon Energy DVN. These are some of the best-performing S&P 500 energy stocks of the first quarter. Marathon Oil was up 62.56% in the January-March period, followed by Zacks Rank #1 (Strong Buy) Diamondback (56.36%), Occidental (54.41%), EOG (49.02%) and Devon (43.83%).

You can see the complete list of today’s Zacks #1 Rank stocks here.

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