OPEC Is Betting Big on Robust Oil Demand Recovery

Last week’s surprise decision from OPEC+ to ease the production cuts by a cumulative 2 million barrels per day (bpd) by July relies on expectations of robust oil demand recovery in the second quarter. Yet, recent demand concerns suggest the alliance’s supply management policies could once again be more in the realm of guestimates.
The easing of the collective cuts by over 1 million bpd over the next three months, plus Saudi Arabia reversing gradually its extra 1 million bpd cut signal that OPEC+ expects demand to rebound strongly and justify supply increases, Reuters columnist Clyde Russell writes.
However, the unpredictability of the COVID resurgence in major economies lagging behind in vaccination programs could spoil the OPEC+ forecasts and supply management policies once again.
Last week, OPEC+ decided to gradually increase collective oil production by 350,000 bpd in each of May and June and by more than 400,000 bpd in July. Additionally, Saudi Arabia will also gradually ease its extra unilateral cut of 1 million bpd over the course of the next few months, beginning with monthly production increases of 250,000 bpd in each of May and June.
Although the initial knee-jerk reaction to the outcome of the OPEC+ meeting on Thursday was heavy selling in oil because additional supply is coming, prices finished strong that day with more than 3-percent gains as the market realized that OPEC+ expects strengthening of oil demand with its decision to put more crude on the market.
Asia’s demand for crude looks strong as gasoline demand looks robust, but demand for diesel and jet fuel is still soft, according to Reuters’ Russell.
India, the world’s third-largest oil importer, added another scare to oil demand forecasts this week, with a record-high number of new COVID cases and a lockdown in the biggest city, Mumbai.
Most analysts continue to believe that the market will be able to absorb the new barrels from OPEC+ with strengthening demand going into the summer months. Goldman Sachs, for example, is still bullish on oil and anticipates strong demand that would require OPEC+ putting another 2 million bpd on the market in the third quarter, after the around 2 million bpd that the alliance and Saudi Arabia decided to return between May and July.

About Parvin Faghfouri Azar

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