OPEC and Russia’s unprecedented production cuts last spring lifted oil prices out of a death spiral. Nearly a year later, the group is under pressure to cool off the red-hot market.
U.S. crude has raced back above $60 a barrel. That’s a far cry from the depths it reached last April when oil crashed below zero (negative $40.32 a barrel, to be exact) for the first time in history. Prices at the pump are starting to creep higher, too. The national average hit $2.70 a gallon Friday, according to AAA. That’s well above the April low of $1.76 per gallon.
Investors are betting the pandemic will soon be under control—and that in turn will unleash pent-up demand for road trips, cruises, flights and other oil-consuming activities.
Against this backdrop, OPEC and its allies, known as OPEC+, are scheduled to meet Thursday to deliberate whether to add more barrels into to the hungry market. They’ve certainly got the firepower, and the price incentive, to do just that.
Last year, OPEC+ slashed output by a record-shattering 9.7 million barrels per day. The emergency steps, along with production cuts by U.S. and other producers, drove a strong rebound in prices. That recovery has accelerated in recent months as millions of people around the world have gotten vaccinated against COVID-19.
OPEC+ could soon announce the market is now healthy enough to step up production this spring.
“Given the allure of higher prices, there should be more supply coming onto the market,” said Ryan Fitzmaurice, energy strategist at Rabobank.
Indeed, sources within OPEC+ told Reuters last week that an output increase of half a million barrels per day beginning in April is possible without building up inventories, although a final decision had not been made.
“Given where prices are, how will anyone tell Russia that they need to curtail production?” said Jim Mitchell, head of Americas oil analysts at Refinitiv.
There are several good reasons for OPEC+ to release more barrels.
First, higher prices mean countries like Saudi Arabia that rely on oil to balance their budgets can bring in badly-needed revenue.
Second, if OPEC+ doesn’t start producing more, other countries will. That includes frackers in Texas who were sidelined by the oil crash.
Bank of America strategists told clients in a recent note that OPEC+ will “preserve market share” by pumping more soon. During the second quarter alone, Bank of America expects OPEC+ to add more than 1.3 million barrels per day of supply.
