Dec 4, 2020 - Energy & Environment

OPEC+ does enough to lift the oil market for now

Illustration of an oil barrel on a spring bouncing back and forth.

Illustration: Aïda Amer/Axios

Crude prices are trading at nine-month highs after a protracted OPEC+ meeting ended with plans to just slightly boost output and fresh signs emerged of a potential Beltway deal on new stimulus.

Driving the news: OPEC+ yesterday avoided a breakdown that would have led to a large output boost in January.

  • That's helping move prices out of the rather narrow band where they've been stuck for almost six months, but they're still pretty low and hardly soaring.
  • While a months-old plan called for easing their joint production curbs by 2 million barrels per day (bpd) in January, the new agreement calls for a smaller 500,000 bpd boost.
  • The group of OPEC, Russia and allied producers now plans monthly meetings starting in January, a packed schedule that reflects the uncertain path of the pandemic and vaccines.
  • Those monthly meetings will discuss moving production another 500,000 bpd.

Why it matters: The market movement is a proxy for wider optimism about a light at the end of the pandemic tunnel, even as the virus is tragically raging right now.

  • "The market rallied to multi-month highs on demand expectations from the vaccine and stimulus, not from OPEC’s management of supply," Mizuho Securities analyst Robert Yawger said in a note.

Yes, but: The meeting outcome avoided what would have been a surprise decision to proceed with plans for a larger output boost, which would have put downward pressure on prices.

  • Goldman Sachs analysts, in a note, said the group avoided a "taper tantrum" with plans for the 500,000 bpd rise.

The intrigue: While rising prices are certainly welcome for the beleaguered U.S. shale patch, a Rystad Energy analyst said the plan for frequent OPEC+ meetings that could adjust output creates new hurdles, too.

  • "This development leaves U.S. shale producers and other market participants with less 'certainty' about OPEC+’ exact production targets going forward," Rystad's Bjornar Tonhaugen said in a note.
  • He also said: "The market euphoria will at some point soon likely fizzle out as the deal is not uniformly bullish, but rather “ok” given the demand and non-OPEC+ supply outlook."
Go deeper