Oil prices soar despite end to OPEC curbs
International energy cartel set to ramp up output; West Texas rig count inches up
Oil prices soared Thursday even as OPEC said it would gradually increase production in May, ending months of production cuts that supported crude’s recovery during the global pandemic.
West Texas Intermediate, the U.S. crude benchmark, jumped nearly 4 percent to settle in New York at $61.45 Thursday. Prices jumped even as the Organization of the Petroleum Exporting Countries and its allies agreed Thursday to gradually increase crude production by 350,000 barrels per day in May and June and by 400,000 barrels per day in July.
Saudi Arabia, which unilaterally reduced production by 1 million barrels a day earlier this year, will bring back 250,000 barrels per day in May, 350,000 barrels per day in June and 400,000 barrels per day in July.
Ultimately, this agreement means the oil market will see an influx of an additional 2 million barrels per day over the next three months, Norwegian energy research firm Rystad said.
“The decision by OPEC+ shows that patience was exhausted among many producers, who could not accept that some countries — and mainly Russia — was allowed to constantly hike their production while others kept it flat,” Rystad’s oil markets analyst Louise Dickson said. “The output rise is not likely to be detrimental, especially for June and July as demand will likely also rise, and that is reflected in the market reaction, which is not a panic one to slash price levels.”
OPEC’s decision surprised analysts who had expected the international oil cartel would not increase production in May, as some countries suffer vaccine setbacks and impose more lockdowns to slow the spread of new COVID-19 variants. OPEC’s technical committee and Saudi Arabia’s Energy Ministry had earlier cautioned members about ongoing uncertainties surrounding the economic recovery from the pandemic.
“Until the evidence of recovery is undeniable, we should maintain this cautious stance,” Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman said in his introductory statement Thursday. “The waves are still tall and the sea remains rough.”
However, many members found it too difficult to accept that Russia and Kazakhstan are allowed to increase their output while others are bound to curtailments, Rystad said.
A technical OPEC committee on Wednesday warned that oil demand remains fragile, downgrading its growth outlook to 5.6 million barrels per day in 2021, below Rystad’s expectation of 5.7 million barrels per day and Wood Mackenzie’s 6.2 million barrels per day.
Analysts expect U.S. shale production will remain muted even as crude prices hover around $60 a barrel. That’s because U.S. shale producers have promised to keep drilling and production flat until next year and beyond to focus on restoring battered balance sheets and woo back skeptical investors.
Drilling rigs are returning to the oil patch as crude prices climb and demand recovers. Oil-field services firm Baker Hughes and research firm Enverus said Thursday that the number of rigs in operation nationally rose by 13 this week, pushing the U.S. rig count to 430 — still 234 fewer than this time last year.
In the Permian Basin of West Texas, the nation’s top-producing shale play, the number of rigs rose by three to 224.
Still, U.S. production is expected to decline by a half-million barrels per day in 2021, and is not in a position to grab market share from OPEC, said Ann-Louise Hittle, Wood Mackenzie’s vice president of macro oils.
“The agreement is supportive of oil prices, yet should also help avoid a sharp spike upward as oil demand picks up,” Hittle said.