Oil above $70 as recovery, travels bolster OPEC’s output decision

•Higher prices spell doom for subsidy payments

As economies recover and anticipate improved summer travels, OPEC and its allies will carry on with production increases, just as oil price surpasses $70 a barrel ceiling despite coronavirus crises in Asia and the prospect of sanctions relief for Iran.

Brent Crude traded above $71 per barrel yesterday, but closed lower $70.18 at 5:49pm, local time, while Nigeria’s Bonny Light closed at $68.38 per barrel

The 23-country OPEC+ alliance, which held almost seven million b/d of production offline in April, is in the process of boosting output by some 2.1 million b/d from May to July—roughly two per cent of pre-pandemic demand—of which 1.4 million b/d will come from Saudi Arabia.

The International Energy Agency had said global oil prices would face further upward pressure unless OPEC+ members increase output in the coming months to meet a strong demand rebound.

While higher oil prices are expected to increase government’s earnings, there are worries about rising subsidy payments and contributions to the Federation accounts by the Nigerian National Petroleum Corporation (NNPC).

Delegates note that the plan likely will remain intact until more clarity emerges over the fate of the Iran nuclear deal and the impact of coronavirus containment measures in India, Japan, Taiwan, and other hotspots.

In its latest oil market report last month, the IEA said it sees a major oil demand rebound of some 5.4 million b/d in 2021, and forecast that likely supply growth by the OPEC+ group and others would be “nowhere close” to the expected demand increase.

OPEC’s recent monthly oil market report showed that it expected 6.0 million b/d of demand growth in 2021, with a supply deficit of 1.4 million b/d.

“The projections for oil are largely unchanged from our last meeting, with demand expected to grow by 6 mb/d to around 96.5 mb/d on average for the year, an increase of 6.6%. As with the economy, the market outlook for later this year looks especially promising,” OPEC Secretary General Mohammad Barkindo said at the JMMC meeting, which preceded the full OPEC+ meeting.

“In fact, we anticipate that demand will surpass 99 mb/d in the fourth quarter, which would put us back in the range of pre-pandemic levels,” Barkindo added.

This suggests that despite the still high COVID-19 uncertainty, especially in parts of Asia such as India, OPEC, and the OPEC+ group, expect the market to accommodate further increases in production, as well as a return of Iranian barrels.

“We anticipate that the expected return of Iranian production and exports will occur in an orderly and transparent fashion, thereby maintaining the relative stability that we have worked hard to achieve since April of last year,” Barkindo said.

“The [oil] demand picture has shown clear signs of improvement,” especially in the US and China, Saudi energy minister Prince Abdulaziz bin Salman said in his opening remarks to the OPEC+ meeting June 1. He praised the global rollout of coronavirus vaccines, which have now totalled 1.8 billion doses administered around the world.

“This is commendable and can only lead to further rebalancing of the oil market,” he said. Despite the demand rebound, the prince said “there are still clouds on the horizon, and therefore we should continue to consult and closely monitor market fundamentals and be proactive to ensure market stability.”

Even with a deal, OPEC+ ministers have said they are confident the market can absorb the additional volumes of Iranian crude without prices tanking.

Beyond July, however, production levels are yet to be determined. The OPEC+ supply accord calls for quotas to be held steady from July to April 2022, but ministers have said they reserve the right to change them as market conditions warrant.

Russian Deputy Prime Minister Alexander Novak, who co-chairs the JMMC, highlighted the recent improvements in the global oil market, but noted that “some risk factors” persist.