OPEC+ eyes 2021 plan
Production increase from cartel will create massive glut, Rystad says
The Organization of the Petroleum Exporting Countries gathered in a virtual meeting Nov. 30 and was scheduled to meet Dec. 1 with its affiliated producing countries including Russia to decide the fate of the group’s scheduled Jan. 1 production increase of 2 million barrels per day.
Analysts and traders widely expected the extended group - known as OPEC+ - to roll over existing production cuts of 7.7 million bpd, due to a spike in worldwide COVID-19 cases which caused a slower recovery of oil demand than that projected by OPEC when cuts were implemented in the spring during the first wave of the pandemic.
Despite announcements in recent weeks of three promising vaccines for the virus, OPEC now anticipates that a meaningful demand recovery from the pandemic will not occur until mid-year 2021.
Saudi Arabia had recommended a three-month extension to the existing level of cuts.
The Dec. 1 meeting was instead rescheduled for Dec. 3 when it became apparent that some members harbored objections to continuing the cuts into the new year without modifications.
The United Arab Emirates agreed that an extension of supply cuts was needed, but it demanded that participating countries adhere to the cuts and compensate for previous excess output, Reuters reported Dec. 1 citing multiple sources.
Russia - blaming a harsh winter season - fell short of its agreed cuts of 2 million bpd, with cumulative overproduction since May of 530,000 bpd.
Iraq had a cumulative overproduction of 610,000 bpd over the same period.
Iraq’s Deputy Prime Minister Ali Allawi reportedly said during a virtual conference prior to the Dec. 1 meeting that he is no longer willing to accept a “one size fits all” approach to production cuts and wants considerations such as per capita income and sovereign wealth funds to factor into production quotas for individual members, according to a report by Al Jazeera.
OPEC+ member Kazakhstan also indicated it would like to increase production going into the new year.
Iran and Venezuela are exempt from OPEC+ cuts because U.S. sanctions and internal political strife have depressed oil production in those countries.
Libya has also been exempted from the cuts, but with the country swiftly ramping up its oil production to 1 million bpd following a landmark ceasefire deal among warring groups, it may be asked to participate at some point.
The price of OPEC basket of thirteen crudes stood at $46.72 per barrel Dec. 2, compared with $46.43 the previous day, according to OPEC Secretariat calculations.
Major oil benchmarks closed lower on Dec. 1. Alaska North Slope Crude fell 75 cents to close at $46.56, West Texas Intermediate slid 79 cents to close at $44.55, and Brent lost 17 cents to close at $47.42.
On Dec. 2, ANS rose 65 cents to close at $47.21, WTI rose 73 cents to $45.28, and Brent closed at $48.25, up 83 cents.
OPEC+ originally agreed to a historic reduction of 9.7 million bpd and was able to pare the reductions back to 7.7 million bpd during the summer lull in COVID cases. Oil prices recovered from devastating April lows and have largely occupied a price channel ranging from $40 to $45 per barrel for the latter half of the year.
But if OPEC+ increases oil output as planned from January, the world will face a new 200 million-barrel surplus through May, Rystad Energy said in a. Nov. 30 report.
Should OPEC+ fail to amend its existing deal, January will bring the largest monthly glut since April, with an average daily surplus of 3.1 million barrels, Rystad said. Smaller surpluses will likely continue through May, before finally starting to shrink from June forward.
Rystad modeled a possible decision by OPEC+ to postpone its production increase and calculated the effect on global oil balances of three-month and six-month extension scenarios.
If OPEC+ postpones its planned January production increase by three months, there will still be consecutive monthly surpluses through May, but the total size will be limited to about 115 million barrels, Rystad said. But if OPEC+ extends the status quo for six months, surpluses will end after March, leaving a smaller, three-month glut of just 90 million barrels, which will be erased by the end of June due to deficits beginning in April.
“We believe keeping the current agreement in place - which calls for raising target production by 1.9 million bpd from January 2021 - could send Brent back down to $40 per barrel or lower,” said Bjornar Tonhaugen, Rystad head of oil markets. “A three-month extension would only provide marginal support to prices but would help to establish $50 as a sturdier floor, while a six-month extension could help to meaningfully deplete the storage overhang and supercharge prices into the mid-$50s.”
Rystad expects the second wave of Covid-19 cases to continue to surge through the end of 2020 and have a residual effect on oil demand in 2021, causing a slow recovery.
“At present, we expect demand for total liquids will not surpass 93 million bpd before year-end 2020,” it said.
If OPEC+ maintains current production, the primary benefactor will be “the most flexible marginal supply source on the market - shale,” Rystad said.
“The past few months demonstrated that $40 Brent was enough to slow oil production growth prospects in the U.S. shale patch, but at the same time it was clearly not a high enough price environment to allow players to thrive, as evidenced by the increase in consolidation and bankruptcy activity,” it said.
“The breakup of the OPEC+ deal in March 2020, when participants failed to agree on an additional 1.5 million bpd of cuts, sparked a full collapse in oil prices with a drop of $10 per barrel from the time the decision was made public until markets opened the following Monday,” Tonhaugen said. “These were of course special circumstances, but a vote of no confidence from OPEC+ this week would surely be crushing for oil prices, though perhaps to a milder degree this time.”
In its calculations, Rystad did not include any material positive effect by vaccines on oil demand in the first half of 2021 because the roll-out of vaccination campaigns remains uncertain. It assumes a slow and gradual roll-out before lockdowns lift and behaviors change in the wider population.