Oil production is poised for expansion in May. OPEC+ countries at a regular online meeting held on April 1 decided to start raising output from May 1. Thus, oil production by OPEC+ countries will expand by 350,000 bpd in May, and by another 350,000 bpd in June. Under the terms of the output cut agreement, Saudi Arabia will increase production by an additional 250,000 bpd in May, 350 mln bpd in June and 400 mln bpd in July.
Meanwhile, Russia, which received a special dispensation to increase oil production in March and April, agreed over the next three months to lift monthly output by only 39,000 bps. OPEC+ countries also agreed to continue monthly online meetings and discuss the current supply and demand situation, in order to be ready at any time to adjust the terms of the agreement.
The oil market reacted sharply to the alliance’s April 1 decision, with Brent jumping 2.7% to $64.46/bbl, and WTI surging 3.2% on the day, after reaching $61.2/bbl. Today, the Western world celebrates Good Friday, so oil will not trade on the ICE, but we believe that the gains may extend into next week unless negativity rolls in over the weekend. And there might be a reason for this.
Notably, according to Baker Hughes, last week the number of active US oil production platforms rose even more than a week earlier, up 13 units to 337 units, while in the week before last the number of new active drilling rigs rose by only 8 units. To remind, in early 2021, the number of active oil rigs stateside stood at only 190, so in just one quarter the rig count climbed by 77%. This means that shale oil production in the United States is recovering, and at quite a rapid pace. And according to the US Energy Department, US oil output was steady at 11 mln bpd for the whole quarter.
On the other hand, an uptrend in oil supply by Iran, a member of OPEC, but not a party to the OPEC+ deal, could also be a negative factor. According to media reports, Iran, bypassing the US embargo, has managed to significantly raise “shadow” oil exports to China, while OPEC, Russia and even the United States are fighting for the promising Chinese market. Apparently, the unanimous decision of OPEC+ to boost oil production from May is due not only to the fact that everyone is tired of such large-scale production curbs, but also to the fact that the parties to the agreement are aware that with higher oil prices, competitors not bound by the output cut agreement become more active.
Likely for this reason, the Saudi Energy Ministry noted cautiously on April 1 that if oil production in Iran reaches 2016 levels (since this year Iran does not participate in OPEC+), it will be possible to think about what to do with oil output restrictions. People in Saudi Arabia are not concerned so much about the growth of oil production in the US, as about the covert expansion of the Iranian oil market, especially since Iran is an OPEC member, and theoretically ought to partners in greater detail about its plans to increase production (for example, as Libya does).
We expect the oil price to trade in the range of $56-66/bbl during H1 2021, while growth above $66/bbl looks unlikely until the oversupply issue has been dealt with.