Crude oil jumped 5% after OPEC+ decided to tighten the oil market further by deferring a planned production increase, basically gambling that US shale producers are more focused on dividends than increasing production. Thereby keeping speculators happy at the expense of the global consumer while adding further fuel to the risk of higher inflation.
In order to defend the 80% rally since early November, the group decided to roll over for one month the 0.5 million barrels/day that was up for discussion. In addition, Saudi Arabia extended its unilateral 1 million barrel/day cut, thereby risking overtightening the market as the global pandemic fades and mobility picks up. Several banks responded by raising their Q3 price forecasts towards the $75 to $80/b area and any short-term risk to oil is now primarily associated with the mentioned deleveraging risks spreading from other markets.
In defense of the group’s surprise decision to maintain production at current levels could also simply be that it’s the result of conflicting signals from the market. In the so-called paper market a rising backwardation in the Brent and WTI crude oil futures contracts have for weeks now been signaling market tightness. Part of this development being driven by speculative buying which tends to be concentrated in the front month contracts, the most liquid part of the curve.
However, the situation in the physical market looks a lot loser with traders saying there are plenty of cargoes available, especially for delivery to the top-importing region of Asia. Having seen and weighed the level of refinery demand for April, the group may have concluded that demand was not strong enough to raise production before May and beyond.