Oil poised for gains as Opec+ decision proves price positive for markets

Crude surged more than 3% after the decision on Thursday

An oil pump jack in the US. The IIF says a strong rebound in oil demand is unlikely in the short term amid rising supplies. Reuters. 

Oil prices are poised for future gains after an unexpected decision by Opec+ to raise supply by 2 million barrels per day.

The group, led by Saudi Arabia and Russia, will add 350,000 bpd next month, with a similar increase set for June. Opec+ will supply 450,000 bpd in July.

Saudi Arabia, the largest exporter within the group, will unwind its extraordinary commitment to support prices.

The kingdom will boost output by 250,000 bpd in May, 350,000 bpd in June and 400,000 bpd in July.

The expected increase in supply caused prices to surge more than 3 per cent after the decision on Thursday.

They also signalled that higher demand and economic recovery would boost prices.

Oil markets were closed on Friday.

Brent, the international benchmark, settled 3.38 per cent higher at $64.86 a barrel on Thursday while West Texas Intermediate, the US marker, closed 3.87 per cent higher at $61.45 a barrel.

“The agreement is supportive of oil prices yet should also help avoid a sharp spike upward as oil demand picks up,” said Ann-Louise Hittle, vice-president of the macro-oils department at Wood Mackenzie.

The Edinburgh consultancy expects a strong recovery in oil demand by the third quarter for the US.

It forecast that global oil demand would this year increase by 6.2 million bpd compared with 2020.

The decision by Opec+ to ease its production cuts is subject to monthly reviews by the group. The group will cut production by 6.85 million bpd in May.

Saudi Arabia’s Energy Minister Prince Abdul Aziz stressed the group’s flexibility but called for caution amid renewed lockdowns in the eurozone.

“We expect oil demand to recover this quarter, likely benefitting from a faster vaccine rollout and the removal of mobility restrictions,” said Giovanni Staunovo, commodity strategist at UBS.

The Swiss bank expects oil demand to rise from the current 94 million bpd to about 99 million bpd during the second half of the year, about the same level as demand before the pandemic.

The backdrop of expected higher demand should keep the oil markets undersupplied by at least 1.5 million bpd, lending support to higher prices.