The move by the OPEC+ group of oil exporters to ease their output restrictions from May onwards is effectively a bet that the current soft demand for crude will improve at the same pace as production returns.
If history is a guide, it will be extremely difficult to get that balance correct, especially in the wake of such a large disruption to the global oil market as the coronavirus pandemic.
With the impact of the pandemic still evident, the decision by OPEC+, the group that includes the Organization of the Petroleum Exporting Countries, Russia and their allies, to add back an effective 2.1 million barrels per day (bpd) of output by July seems brave.
The group decided at a meeting on April 1 to ease their output cuts of about 7 million bpd by 350,000 bpd in May, another 350,000 bpd in June and by 400,000 bpd in July.
In addition, OPEC+’s top exporter, Saudi Arabia, said it was phasing out its extra voluntary cuts by July, a move that will add 1 million bpd.
Last week’s meeting came as something of a surprise to the crude market, which had been expecting OPEC+ to roll over their cuts for another month into May.
However, adding back 350,000 bpd for May is a relatively small amount and given that most refiners will have already completed their buying programs for the month, this part of the OPEC+ decision can be discounted.
The further 350,000 bpd for June may also have a limited impact on the market, again, as many refiners, especially in the top importing region of Asia, are likely to have worked out their needs and therefore their loading programs.
However, by the time July arrives, another 1.4 million bpd could be added back into the market in addition to what was put back in May and June.
The question is whether OPEC+ will be proven correct that demand is recovering at a pace that will see the market being able to absorb that much additional crude.
The group won’t want prices to retreat too much further, despite coming under some pressure from the administration of U.S. President Joe Biden to lower energy costs, and increasing unhappiness about the current price in India, Asia’s second-biggest crude importer behind China.
Global benchmark Brent crude futures retreated somewhat on Monday, ending at $62.15 a barrel, down from $64.86 on April 1, the day of the OPEC+ meeting. They are also some 12.9% below the peak so far this year of $71.38, reached on March 8.
There is evidence that Asia’s demand for imported crude is returning to levels seen before the pandemic hit demand toward the end of the first quarter of 2020.
Crude arrivals in Asia in March are expected to be around 25.2 million bpd, according to Refinitiv Oil Research, slightly down from 25.75 million bpd in February, but up from January’s 24.58 million bpd and December’s 23.21 million bpd.
Arrivals in March last year were 26.6 million bpd, while February 2020 saw 26.7 million bpd offloaded in Asia.
Overall, it seems that while Asia’s demand for imported crude is recovering, it’s not quite back to where it was pre-pandemic.
The other factor that may complicate matters is that the recovery in demand in Asia appears uneven, with gasoline performing better than middle distillates such as diesel and jet fuel.
This would suggest that light vehicle transport is returning, but industrial and aviation demand are still softer than normal.
The profit margin on a barrel of jet fuel in Singapore ended at $3.63 a barrel on Monday, up from the low so far this year of $2.23 on March 31, but still well below the levels of above $15 that were common before the pandemic.
In contrast, the profit on making a barrel of gasoline <GL92-SIN-CRK> was $7.20 on Monday, similar to levels that prevailed in the months prior to the coronavirus outbreak at the start of 2020.
Refiners may be tempted to switch to lighter crudes that yield more gasoline, rather than heavier grades that produce more middle distillates.
This would have the added potential benefit for some refiners, especially those in India, who are seeking to diversify supply away from OPEC+, given that many of the alternatives to Middle Eastern crude are lighter grades from West Africa, the United States, South America and Europe.