OPEC keeps quiet on H2 2021 plans

OPEC+ affirmed their plan to increase production by 2m b/d between May and July, in line with our and market expectations. The producers’ bloc highlighted the improvement in oil market fundamentals, particularly the draw down in inventories and the economic recovery underway in many economics thanks to vaccine programmes.

However, OPEC+ left their view on the rest of 2021 quiet, saying in the official statement only that the bloc needed to “closely monitor market fundamentals” and carry on with monthly ministerial meetings. In comments to the press after the meeting, Saudi Arabia’s energy minister Prince Abdulaziz bin Salman kept plans for the second half of the year minimal, saying that he’ll “believe it when he sees it” on whether OPEC+ needs to add more output.

The original terms of the OPEC+ deal reached in April last year would notionally imply that production would creep up gradually over the coming months but the bloc’s policy this year has been to largely disregard that schedule in favour of short-term adjustments seemingly related to near-term market signals. In that context it would be unsurprising for OPEC+ to keep wanting a hot oil market with Brent prices now above USD 70/b and the market in a steep backwardation. Supply growth outside of OPEC+ is going to be limited this year compared with the past few years of activity and while there are fits and starts along the path to full oil demand recovery, it does appear to be trending higher steadily.

That all shapes up for a tight oil market in the coming months, helping to keep oil prices elevated and feeding into inflation narratives globally. We had pencilled in around a 1.5m b/d deficit in H2 2021 for headline oil market balances, and that incorporated OPEC+ gradually increasing output. If they choose to refrain from increasing production then that deficit will widen further and add more upside volatility to prices. The absence of clear messaging for H2 2021 also adds another element of uncertainty to markets given that the demand picture, while appearing positive, is not following a linear path to higher consumption. For firms exposed to oil as an input cost, they may likely err on the side of caution and buy up available barrels now in the chance they aren’t available in a few months.

OPEC+ officially gave no comment on the outlook for Iran to return to the oil market. Negotiations may have hit a stumble thanks to a release from the IAEA, the UN’s nuclear monitoring agency, that Iran has not been forthcoming about historic nuclear activity. A spokesperson for the government of Iran said that negotiators expected a deal to be reached only by August, pushing the timeline for a return of Iranian oil out further.

Our assumption for Brent oil futures were based on OPEC+ attempting to keep oil markets tight and that Iran’s output would return gradually, if at all this year. Based on this week’s OPEC+ meeting we are reaffirming our view on oil prices and maintain an average of USD 70/b in Q3 and Q4 2021 for Brent futures and USD 65/b for WTI over the same periods.