Last week’s long-awaited OPEC+ ministerial meeting had two surprises in store. Firstly, the outcome was unexpected and secondly the eerie market reaction to the decision was also puzzling. But what was the prelude leading up to the meeting?

A week ago, the group’s Joint Technical Committee (JTC), in its internal report seen by Reuters, concluded that global oil inventories are set to deplete by 445 million bbls in 2021, more than the 406 million bbls forecast the previous month. The new estimate is the equivalent of a drawdown of 1.2 mbpd. This optimism and improvement in the global oi balance could have contributed to the ultimate decision but was entirely overlooked by the market at the time. Even anonymous OPEC sources hinted at the roll-over of the April production level into May and possibly beyond. The day before the meeting the JTC warned of fragile market conditions and concluded that despite the continuous fall in OECD inventories oil stocks in the developed part of the world remain above the producer group’s favoured metric, the 2015-2019 average. The JTC cut this year’s oil demand growth from 5.9 mbd to 5.6 mbpd. At the same time global supply growth was upped by 200,000 bpd to 1.6 mbpd. The worsening of the oil balance led the JTC to conclude that achieving the ultimate target, matching the 2015-2019 average of OECD stocks will be pushed out to August, a month later than projected a month ago.

Oil diplomacy was also in full swing prior to the video conference. Saudi Crown Prince Mohammed bin Salman spoke to Russia’s Vladimir Putin, reportedly about climate change whilst the new US Energy Secretary, Jennifer Granholm also discussed “affordable and reliable sources of energy for consumers” with her Saudi counterpart, but not the oil market, according to the Saudi Energy Minister, Prince Abdulaziz. Nevertheless, it is intriguing to note the that the conversation took place shortly after Brent reached $70/bbl earlier in March. The pain threshold is around $70/bbl for both the current and previous US administrations.

The final outcome of the meeting is now well publicized. In total nearly 2.3 mbpd of crude oil will be added to the market between the end of last month and July as follows: Russia and Kazakhstan are allowed to supply a combined 150,000 bpd extra oil in April. Next month and in June the tapering will be 350,000 bpd and in July an additional 441,000 bpd of oil will be pumped (initial reports put the latter figure at 400,000 bpd). Saudi Arabia will also implement a staggered easing of its voluntary constraint of 1 mbpd. The kingdom will supply an additional 250,000 bpd in May, 350,000 bpd in June and 400,000 bpd in July. Despite the unforeseen decision the oil market greeted the outcome with a significant rally. WTI finished Thursday $2.29/bbl higher and Brent recorded a daily gain of $2.12/bbl.

There are ostensibly two or maybe three possible explanations for the optimism the 2.3 mbpd tapering triggered. Firstly, it is still much lower than the demand growth estimated by the JTC. Thirst for the black stuff is to rise by 4.1 mbpd between March and July; rebalancing is supposed to accelerate towards the third quarter. Secondly, by the end of July the producer alliance will still pump 5.8 mbpd less than the reference production level. Last but not least, OPEC is refreshingly confident that the world’s oil demand growth will be uninterrupted going forward. For the incumbent quarter, the JTC estimates show global consumption to be at 94.6 mbpd. It is 1.2 mbpd less than seen in the middle of March when the group’s Monthly Oil Market Report was released. For the second half of the year, however, it is estimated to swell to 98.2 mbpd, 3.6 mbpd higher than in 2Q. It is this optimism, which is based on taming the virus by successful inoculation programmes worldwide in the latter part of 2021, that probably helped Thursday’s rally. In fact, further and rather significant tapering can be pencilled in after July to prevent the market from, in the words of the Russian Deputy Prime Minister, Alexander Novak, overheating. The JTC’s warning from last Tuesday, however, must be heeded. The current situation is fragile, therefore re-visiting the recent highs, whilst it is widely expected to happen, is not imminent. Until there are palpable signs of falling infection rates the oil market is likely to remain violent and hectic. The road to a bullish second half of 2021 is paved with volatility.

The counter-intuitive reaction to the latest OPEC+ deal has not lasted. Market players had the long weekend to reflect on the surprise decision the producer group made last Thursday. When the outcome was included in price formulas and algorithms the conclusion they arrived at was that Thursday’s rally was pre-mature. Even though there is a wide consensus that global oil consumption would pick up meaningfully in the second half of the year the current oil balance, due to struggling demand growth and the extra 2.3 mbpd oil that will flow back to the market in the next four months (not to mention the increase in Iranian supply under the radar), will get looser. The anticipated slowdown in stock depletion is also reflected in the weaking crude oil structure. The June/July Brent spread, which was +85 cents/bbl a month ago is now only 32 cents/bbl. May WTI that commanded a premium of 50 cents/bbl over June at the beginning of March is now fetching a discount of 3 cents/bbl. If the shedding of length was the product of demand concerns, then last week’s OPEC+ decision just added another layer of (possibly short-term) bearish uncertainty in the form of the increase in physical supply. Solid optimism for the latter part of the year puts a floor under the price fall but loosening oil balance makes the test of recent highs implausible in the near future.