OPEC+ Production Boosts And Their Price Impacts

Summary

• Various OPEC+ peers have started announcing production boosts which can have a strong impact on oil price.
• These are numerous headwinds which help highlight how volatile the oil markets can be.
• We recommend continuing to hold oil market positions with caution after the recent run-up.
• Looking for a helping hand in the market? Members of The Energy Forum get exclusive ideas and guidance to navigate any climate. Learn More »

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Oil markets today were rattled by announcements from OPEC+ that they would be boosting output. WTI and Brent Crude prices dropped roughly 3%, driving the energy sector down more than 3% versus the broader market, and other stocks more significantly. Continued pressure by a rising U.S. rig count is also adding to this.

OPEC+

The biggest piece of news is OPEC+ and the plan to revitalize production from strong prices.

OPEC+ Production - Financial Times

The announcement is for 350 thousand barrels/day of production increase in May, followed by 350 thousand barrels/day in June, and 441 thousand barrels/day in July. There's a potential argument for additional increases. That production isn't too massive (1 million barrels/day across 3 months). However, it points towards future of increases as markets balance.

That means that markets will likely not have the chance to recover in the same way as they would if a demand-supply imbalance was allowed.

U.S. Rig Count

Another risk in the recovering market is the ever uncertain U.S. rig count and its impact on production with its quick ability to be taken online and brought back.

Baker Hughes Rig Count - Baker Hughes

The above chart shows the rig count along with the summary. The U.S. rig count of 430 has gone up ~5% over the past week, but it's still down more than 50% over the past year. In Canada, rigs dropped ~15% week over week but are actually up year over year showing a stronger long-term recovery from a much smaller number of rigs.

Internationally, the recovery has also continued with rigs up 2%. However, over the past year, the rig count is down almost 50%. That is worth paying close attention to. However, as prices remain strong, it's important to note that these rig counts will continue ticking up and the oil they drill will eventually be reflected.

Iranian Output

Another potential issue looming on the horizon is potential growing Iranian output.

There are two avenues here. First, the U.S. government has shown a new willingness to negotiate with Iran if they taper their nuclear ambitions. Second, China has been increasingly friendly towards Iran, increasing the potential of backroom, past sanctions, oil shipments. Both of these things stand to negatively hurt the supply in the markets.

Iran Oil Output - Investopedia

The timing and impact of these things are worth paying close attention to. Iran's oil exports moved from a 2016-2018 peak of more than 2 million barrels to ~500 thousand barrels/day. That means ~1.7 million barrels/day of exports if they return towards their previous peak, perhaps even 2 million barrels/day.

That's a significant amount of exports that could be dumped on the market and it's something worth paying close attention to.

Market Recovery

The market recovery here is tenuous. They recovered towards almost $70/barrel Brent crude, however, they've since bounced back down, especially when counting the pressure today. Additional production could put pressure on the oil price recovery unless the recovery in the overall markets is equally as strong. While that's looking likely, there's no guarantee.

We still expect Brent crude to average $60-70/barrel through 2021. That's a level which the markets haven't priced in' however, it's still well below where they had the potential to be. For those interested in investing, we recommend either holding onto your current investments, or cautiously investing in a broad energy ETF like the Vanguard Energy ETF (VDE).

Thesis Risk

We expect oil markets to recover, however, the growing production has the potential to put a strong damper on prices. Our current range for prices, with potential production coming back, is around current prices. We don't foresee the same spike that we originally did. However, we still see opportunity in the markets due to our view that markets aren't reflecting current prices.

However, the supply-demand balance, when new supply comes online, is precarious. Should another COVID-19 wave, for example, cause demand to temporary drop, there exists the risk of another downturn. This is a risk investors should pay close attention to. We'd view it as an investment opportunity, but it could involve significant short-term pain for positions.

However, overall, we see the most likely outcome as oil prices continuing to hold onto their current strength.

Conclusion

OPEC+ has recently announced that it's expecting to recover production. Additionally, U.S. rig count is growing, pointing the potential ability towards growing production. Lastly, there's additional signs pointing towards Iranian exports bottoming out. They could grow in the future back to levels before the collapse.

All of this put together points towards millions of barrels/day of production coming online. That could put a damper in the oil price recovery. We recommend investors continue to hold onto their investments; however, there's no guarantee of a recovery at the same pace. As a result, we recommend being cautious about new investments.

Analyst’s Disclosure: I am/we are long VDE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.