In April the 13 countries agreed to take 9.7 million barrels per day (bpd) out of the market to restore balance. They agreed on a sliding scale of trimming cuts to 7.7 million bpd mid-year and 5.8 million from Jan. 2021. These cuts cost the OPEC nations dearly, because member countries are hit by the double whammy of reduced volumes and lower prices. There is discord between traders’ optimism based on the hopes of vaccines on the horizon and the reality of demand, especially in North America and Europe.
Demand is a tale of two sides: West of Suez, which looks challenging, and east of Suez, where the economies, particularly in China but also increasingly India, have been growing and, with it, oil demand.
Markets were slowly rebalancing, however a second wave of the pandemic necessitated both OPEC and the International Energy Agency to revise downward their forecasts for the remainder of this year and next.
The Paris-based agency sees demand for 2020 to be 8.8 million bpd below 2019 levels in 2020, and around 3 million bpd below pre-COVID levels in 2021.
Libya, which is exempt from the OPEC+ cuts, has restarted production and added around 1 million bpd, which are set to stay.
The new US administration is also said to want to revisit the Joint Comprehensive Plan Of Action (known commonly as the Iran nuclear deal), which may come hand-in-hand with an easing of sanctions. This could bring further barrels on the market, although probably only after mid-2021.
Russia has traditionally never been a fan of supply cuts. Yet, looking at the current demand picture, President Vladimir Putin himself flagged the possibility of extending the 7.7 million bpd level into 2021, which was a course of action favored by Saudi Arabia. However, that was before the latest rise in the oil price.
It is hard to keep up morale and entice people to keep swallowing a bitter pill when relief seems close. Vaccines are still in the future and markets which are rebalancing ever so slowly are the present.
To that end, there have been rumblings among the rank-and-file membership. Some countries such as Nigeria and Iraq, who face their own set of domestic issues, have started complaining about the “one size fits all approach” of OPEC+.
Others, like the UAE, are said to prefer discussing an extension of the 7.7 million bpd cuts into 2021, after countries that flouted their production quotas have compensated for past sins. The discord with the UAE is taking place behind closed doors, but sources familiar with the discussions believe that the emirates are quietly re-evaluating membership.
This casts a shadow over the meetings on Nov. 30 and Dec. 1, when ministers have to decide the way forward. OPEC decisions have to be taken unanimously, which complicates matters further.
Before the full ministerial gathering there will be a pre-meeting on Sunday with a select group of OPEC+ countries.
It is hard to underestimate the importance of the upcoming discussions and decisions because it will determine whether an extra 3 million bpd (2 million bpd from the relaxation of OPEC+ cuts plus the million from Libya) will hit the markets or not. This may be too much for markets at this point, despite a positive outlook in Asia, which is real, and high hopes for vaccines, which are a thing of the future.
It is hard to underestimate the importance of next week’s meetings, because they will influence the short-term trajectory of oil markets. They are also important in terms of reaffirming cohesion within OPEC+.
We should not forget that oil markets would never have rebounded so quickly without the decisive action of the 23 nations in OPEC+.
While oil markets have not yet fully recovered, we have come a long way since the heady days in mid-April, when WTI turned negative for about 24 hours.
• Cornelia Meyer is a business consultant, macro-economist and energy expert. Twitter: @MeyerResources
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