Oil markets went on another roller-coaster ride yesterday. Brent and WTI shed around $2.50/bbl, reversing a big chunk of Wednesday’s gains, as demand worries returned to the fore of traders’ concern. The latest round of Covid lockdowns in Europe has revived jitters about oil demand, so much so that they outweighed supply concerns caused by a blockage in the Suez Canal. Traffic along the vital sea channel remains suspended as efforts to dislodge the giant container enters a fourth day. Salvage companies warned that the passage could be blocked for weeks as the rescue operation drags on. In any case, the backlog of more than 200 ships will take a while to clear once normal service is resumed.

Away from the Suez Canal drama, a vaccine summit got underway in the EU. Leaders shied away from halting vaccine exports and stepped back from a vaccine war with Britain. Of less encouragement was news that India, one of the world’s biggest vaccine producers, has imposed a de facto ban on jab exports as it seeks to prioritise local vaccinations amid another wave of infections. Vaccine nationalism is becoming the status quo in certain parts of the world, the dangers of which are all too obvious.

Recent price weakness across the energy complex underscores just how dependent the oil demand recovery is on the successful rollout of vaccines. That said, the next major price catalyst will be the upcoming OPEC+ decision on production levels beyond April. The producer alliance has kept schtum as prices plunged ahead of next week’s meeting. However, market players got a glimpse yesterday into the group’s thinking. OPEC’s third-largest producer, the UAE, has reportedly deepened crude oil supply cuts to Asian customers in June compared to May. In short, OPEC+ is likely to keep the oil spigots tight for a while yet.

OPEC+ to the rescue?

As George W Bush once said,” Fool me once, shame on – shame on you. Fool me – you can’t get fooled again.” What the monosyllabic former US President was trying to say is that after being tricked once, one should learn from one’s mistakes and avoid being tricked in the same way again. A case in point is OPEC+ production strategy. Earlier this month, market players were caught unawares after the group agreed to hold production largely steady in April, confounding expectations that it would ease supply curbs. This time round markets are positioning for a similar outcome. A consensus is rapidly emerging that OPEC+ will tilt towards the side of caution when they meet next week and maintain current production levels, rather than act to increase supply.

Underpinning expectations that OPEC and its allies will keep oil production largely steady for another month is a flurry of bearish signals, chief among which is the worsening demand picture. Europe is at the mercy of a third wave of the Covid-19 pandemic as cases flare up uncontrollably. Governments have rushed to extend lockdowns and restrictions, which in turn have set the stage for a downturn in European fuel consumption. What’s more, oil demand trends are not only pressured by renewed lockdowns on the continent but also chaos with its vaccination program. The EU continues to lag behind in its vaccination scheme and could delay the global oil recovery by up to 1 mbpd this year, according to Rystad Energy.

In addition to the weakening demand-side narrative, other bearish factors at play include rising supply from OPEC members that are exempt from production cuts. Venezuela’s oil shipments are on a tentative upswing. Exports from the Latin American producers rose in February to over 700,000 bpd to their highest level in 10 months, according to Refinitiv. Meanwhile, Libya’s production outlook is also skewed to the upside. The country has a unified government for the first time in more than a decade of civil war. Stability has returned to the embattled producer and it recently revealed plans to boost the current production rate of 1.3 mbpd to 1.45 mbpd by the end of the year. And then there is the biggest wild card. Few can rival Iran in terms of the volumes that it can put back into the market. A host of tanker-tracker specialists recently confirmed what everyone has been saying recently: that Iran is selling plenty of oil to China. And there is no saying how much more will be purchased if US sanctions are lifted.

Aside from exempted OPEC members, producers not taking part in global output cuts are also enjoying an increase in upstream activity. Take the US as an example. The number of oil rigs in operation is at its highest since last May. Moreover, activity and spending in U.S. oil fields is soaring this year, according to energy company executives polled this week by the Federal Reserve Bank of Dallas. And there is more reason for OPEC+ to fret aside from a bigger-than-expected rebound in non-OPEC supply. US crude oil inventories are trending higher, and the dollar has found a new lease of life. Simply put, headwinds are aplenty for the oil market.

The myriad of hurdles facing the oil market has vindicated OPEC and its allies in pursuing a cautious approach to production. And they will continue to do so rather than risk jeopardising previous gains in draining bloated global oil stocks. In other words, OPEC+ will stick to their collective oil production cuts in May. While this will reinforce the $60/bbl floor, there is no guarantee that it will add significantly to near-term upward price pressures.