OPEC+ outlook: Producer faces tough decisions as demand and prices increase
Quantum Commodity Intelligence – The 23-member OPEC+ group will gather virtually Thursday to discuss oil markets for the balance of year and most importantly, how much additional oil is OPEC+ willing to release into the market from August onwards.
Goldman Sachs is in no doubt, saying this week that "much more OPEC+ supply will be needed" to balance the oil market by 2022, forecasting demand to rise by an additional 2.2 million bpd by year-end, leaving a potential 5 million bpd supply shortfall going into next year.
The group has typically lagged production versus demand growth since its meetings went monthly this year, taking a deliberately cautious approach, in part to bring inventories back to 2015-2019 averages.
"The group will likely prefer to stay behind the demand curve, rather than ahead of it as long as Brent doesn't surpass $80 per barrel," noted Louise Dickson, senior analyst with Rystad Energy.
But OPEC+ meets after crude markets posted strong gains during June, with Brent up by over 7% on the month, while WTI was more than 9% higher.
The International Energy Agency has called on OPEC+ to "open the taps" to address the supply/demand imbalance, while consumer nations are also pushing for an increase of at least 1 million bpd as a counter to higher prices.
"OPEC's next move matters enormously. While in a good position, they will remain cautious, with a view not only for the path forward for H2 2021 but arguably a more choppy 2022 given the return of US shale and Iran," said Ahmed Mehdi, energy consultant and Research Associate at the Oxford Institute for Energy Studies.
Three meetings
But ministers and delegates face a long day with Thursday's schedule including a regular OPEC meeting, following by Joint Ministerial Monitoring Committee (JMMC) and then the full OPEC+ meeting.
The OPEC+ Joint Technical Committee (JTC) earlier this week flagged a scenario showing a 2022 stock build.
One sticking point could be finding consensus between Russia, the group's most hawkish member, and Saudi Arabia, who has been the key architect behind the more cautious position that has seen oil prices reach the highest levels since October 2018.
"There appears to be a lack of agreement between the two leading nations in the alliance, Russia and Saudi Arabia, about whether production should be further increased in August, and if so by how much," said Commerzbank.
One less immediate problem for OPEC+ to worry about would appear to be the imminent return of Iran, as talks look to have stalled.
"Negotiations over Iran's nuclear program are facing renewed delays," said Daniel Hynes, senior commodity strategist at ANZ. "Diplomats have been working to renew the nuclear deal for months; however, talks have broken down as both Iran and the US refuse to budge from their positions."
For now, consensus is rallying around a modest 500,000 bpd increase from August or September, although the group may also make longer-term commitments, but subject to demand growth.
Highlights of key OPEC+ meetings
March 2020
OPEC+ group fails to reach an agreement on cutting supplies in face of the COVID-19 pandemic, as both Russia and Saudi increase production, triggering a sharp price drop.
April 2020
OPEC+ agrees to a record supply cut of 9.7 million bpd, oil prices rebound.
June 2020
Producers agree to extend the first phase of the 9.7 million bpd cuts for another month but announce plans for reduced cuts to 7.7 million bpd starting in August.
December 2020
Members announce a small 500,000 bpd increase for January 2021. Agree to hold meetings on a more regular basis in 2021 to review market conditions.
January 2021
Agree to keep output steady except for small increases in Russia and Kazakhstan. Saudi Arabia announces a voluntary 1 million bpd cut for February and March.
March 2021
Agree to hold output steady apart from Russia and Kazakhstan. Saudi Arabia extends the voluntary 1 million bpd cut until at least April.
April 2021
OPEC+ agrees to gradually increase production by 1 million bpd May-July, while Saudi to restore 1 million bpd of voluntary cuts.
June 2021
OPEC+ meeting lasts under one hour, ends with agreement to stick with existing plan, but no discussion on output changes for August and beyond.