Oil price largely stable on mixed signals - Rystad Energy comments

The OPEC+ deal during Easter holidays brought no resurrection to oil prices on Tuesday, as they just are trading almost 1% higher this morning.

The market is getting some mixed signals today about forward oil market fundamentals. The bullish forces include the news that Saudi Arabia and core-OPEC (UAE, Kuwait) flouted yesterday that they would be ready to cut an additional 2.8 million bpd on top of the 9.7 million bpd OPEC+ cut target deal. Moreover, the US President signaled that his administration is working on a plan to reopen the country from lockdown “soon”.

On the bearish side, in Europe, both France and the UK are signaling the countries lockdowns will be extended into May, following the announcement by Italy last week.

The muted oil price reaction to the largest oil output deal on record is no surprise to us, as we still expect demand to be 28 million bpd below the normal 100 million bpd in April, and 21 million bpd below normal in May.

To “turbo-charge” the impact of the agreement reached, Trump and OPEC+ have tried to explain to the market that the cut would be closer to 20 million bpd. This can only be achieved by “creative accounting” and only exist on paper, but we agree that there will be production shut-ins and additional supply removed from the market.

However, even when including Libya, Iran, Venezuela (exempt from cuts), declines in the US, Canada, Brazil and possibly other countries, the reduction will not reach anywhere near 20 million bpd from 1 May as reducing upstream supply is not just turning of the tap or pushing a button.

We would be surprised to see overall OPEC+ compliance at 50% through May, which is what we believe Saudi Arabia also knows. However, we do believe the deal is potentially bullish for oil prices down the line, as the deal has a surprisingly long duration with 6 million bpd cuts through the 1Q 2022 – long after the market has hopefully recovered from COVID-19 demand losses. For those who endure this downturn, 2022 looks increasingly bullish for the oil price in our view.