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# OPEC Loosens Quotas, Oil Rallies on the News

## Oil demand is expected to rise just enough this year for a small increase in OPEC production.

OPEC+ will begin loosening its tight production quotas, adding more than 1 million B/D to global markets in the coming months.

Most of the added crude will be coming from Saudi Arabia, which will unwind its 1 million B/D voluntary reduction over 3 months beginning in May. OPEC sources at today’s meeting reportedly said the total production increase will be nearly 1.12 million B/D over that period.

Oil traders reacted positively to the news, which set off a late-day rally in the Brent market, which closed up $1.09 at$64.66/bbl.

The OPEC+ decision suggests the body is embracing predictions of rising demand ahead. But not big ones.

Wood Mackenzie, in reaction to the news, said, “We see the supply and demand balance tightening in both quarters with global stock draws in each. This view takes into account our expectation that today’s meeting would see a phased increase of production from May.”

The group of OPEC countries and other big exporters, particularly Russia, made the announcement after its monthly videoconference to evaluate the oil market and consider adjusting the production cuts from last year.

While the monthly meeting added 1 million B/D to the market, the group is sticking with most of the 7 million B/D reduction from last year, which has helped soak up much of the massive oil surplus built up during last year’s demand collapse.

Modest additions to the oil supply should support continued strong prices but “avoid a sharp spike upward,” Wood Mackenzie said.

The fundamentals are sending mixed signals now. On the plus side, rising vaccination levels could allow a loosening of limits on activity, allowing comeback for industries, such as airlines, which were major consumers of oil products.

On the downside, rising infection rates in Europe and parts of the US could force responses that will delay the recovery.

A surge in production by US producers remains a concern, but they are showing no sign of going back to growth mode.

US production this year is expected to rise to 9.1 million B/D from 8.7 million B/D last year. But exploration and production spending budgets still look tight.

The number of wells drilled in US shale plays is expected to decline by 1% this year, according to a report from Westwood Global Energy Group. Shale production growth is likely to come from fracturing wells drilled but not completed last year, with a 15% rise in wells completed to 9,300 in 2021. There are plenty available after a 50% drop last year in completions.

Most of those additions will be in three plays: the oil-rich Permian, up 71%, and two gas-only plays, the Haynesville and the Appalachian plays, which cover the Marcellus and the Utica, Westwood said.

One voice supporting the loosening of production quotas was the new US Energy Secretary Jennifer Granholm, who tweeted about a call to the Saudi Arabia’s Minister of Energy Abdulaziz bin Salman al-Saud.

“We reaffirmed the importance of international cooperation to ensure affordable and reliable sources of energy for consumers,” the tweet from @SecGranholm said.

It appears the US administration, which has made accelerating the transition away from fossil fuels a priority, recognizes that gasoline prices remain important to American consumers. Carbon emissions, though, were also an issue on the call.

“We also discussed closer collaboration to solve common challenges and develop renewable energy sources, increase efficiency, reduce methane in oil and gas production, and develop clean forms of hydrogen to combat climate change,” she tweeted.