OPEC+ Gilding the Lily

William Shakespeare put it best in his play, King John, “To gild refined gold, to paint the lily, to throw a perfume on the violet is wasteful and ridiculous excess."  The OPEC+ countries had some attractive options in front of them this week as they deliberated on April production levels. ESAI Energy estimated that they could add 1.4 or even 2.0 million b/d of crude oil to the market without crushing the price or reversing the stock draw. Most analysts asserted a similar view. But Saudi Arabia decided to keep its unilateral 1.0 million b/d production cut for February and March in place through April, and the rest of the countries agreed to add only about 150,000 b/d (Russia and Kazakhstan) to output. This was clearly “gilding the lily,” shorthand for Shakespeare’s more eloquent warning that sometimes trying to make something that is very good even better can be wasteful.

This decision will be wasteful for the OPEC+ countries as it accelerates the stock draw and supports prices, which will help all non-OPEC producers lift production to meet recovering demand this spring and summer. There was no need to surrender this market share or lift prices even higher, and the OPEC+ countries (except maybe Russia) may regret this step. It is likely to yield high enough prices that these countries will struggle to collaborate in May. Finally, a higher crude oil price will shield the nuclear negotiations with Iran from market implications that could be harmful to shale producers.

The following chart shows the impact on the global stock draw. The pandemic caused a global stock build of about 1.2 billion barrels between February and May 2020. With the current OPEC+ decision, half of this stock build will be gone by the end of April, and the rest will be gone by the end of November, at the latest.

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