Will OPEC finally address the elephant in the room?

Considering the deal is about to end soon, Saudi Arabia and other producers with available spare capacity may opt to increase production sooner than expected in order to dampen record fuel prices and with that the risk of demand being negatively impacted. Oil producers have historically been better at controlling rising prices by raising production than supporting falling prices by the painful process of cutting production at a time when lower prices drive down revenues, the latter being a situation Saudi Arabia and most other producers would like to avoid.

The coming months are likely to be particularly challenging with EU’s import ban on seaborne Russian crude, as well as the UK and EU agreing a co-ordinated ban on insuring ships carrying Russing oil, the prospect for a revival in Chinese demand, the summer driving season and increased demand towards cooling.

Even if the deal is being put on hold, we believe the negative price impact could be limited as the market want to see whether Saudi Arabia, UAE and a few others have the spare capacity needed to boost production. So, while it may be high on signal value, the actual impact in terms of additional barrels reaching the market may not be enough to prevent prices from staying elevated. OPEC+ meets tomorrow and from expectations of another pointless meeting rubberstamping an elusive production hike, the meeting has suddenly become a potential major market moving event.

Brent briefly had a look above $120 per barrel this week, a level we highlighted as a potential ceiling in our Q2 outlook. Whether the price will stay below very much depends on OPEC’s ability to soothe a market focusing on tight supply and robust demand. Short-term the market will focus on the resistance-turned-support level at $114.80/b.

Note: EIA’s weekly stock report has been delayed until Thursday with the API reporting tonight, also a day later than usual due to Monday’s Memorial holiday.