OPEC+ set to parry calls for higher increase as winter energy crunch looms
Quantum Commodity Intelligence - The OPEC+ producer alliance will likely face further calls to accelerate production hikes ahead of its latest virtual meeting on 4 October as benchmark Brent prices hover close to $80/barrel while leading independent energy consultants have issued dire warnings of potential shortages.
Growing consensus expects OPEC+ to stick to its guns and proceed with what many view as only modest increases, despite growing fears of a global energy crunch heading into the northern hemisphere's winter.
"OPEC+ is expected to stick to its current production deal, despite fears of a lack of supply relative to rising demand as the economic recovery from Covid-19 continues. As oil reached $80/b, there is building pressure for OPEC+ to increase production levels," said London-based Eagle Commodities Brokers.
OPEC+ agreed in July to adjust production upwards by 400,000 bpd every month starting August 2021, until the phase out of 5.8 million bpd of production cuts is completed.
Earlier this week, the US raised the bar when White House Press Secretary Jen Psaki said the US was speaking to OPEC "on the importance of competitive markets and setting prices".
Perhaps more intriguingly, Psaki said the administration had also engaged with the US Federal Trade Commission (FTC), which deals with antitrust issues, asking it "to use all of its available tools to monitor the US gasoline market and address any illegal conduct that might be contributing to price increases".
Key Asia consumers, particularly India and China, are likely to lobby through backchannels for higher output, although India has been vocal in its calls for higher oil exports in the past.
Crunch
However, several OPEC ministers have so far indicated the group sees no reason to alter course from the current path, including those from the UAE, Iraq, and Nigeria.
"OPEC+ face a difficult decision over the next few days. In our view, the course they should choose is clear—they must raise output by more than the 400,000 bpd planned for November and December," said energy consultants FGE.
"The loss of supply after Hurricane Ida, combined with the potentially bigger impact on oil demand of soaring LNG prices, has shifted the global oil balance in Q4 from finely balanced to looking extremely tight."
FGE said that if OPEC+ sticks with its plan for 400,000 bpd November and December, then Brent prices would likely reach $90/b, at least briefly. FGE had previously forecast $80/b Brent for Q3 in early June.
Meanwhile, Norway-based Rystad Energy said prices would likely remain at current elevated levels unless OPEC+ agrees to pump more oil than currently planned.
"The group will need to decide on a supply plan – either keeping its conservative 400,000 bpd planned incremental increase which wouldn't dramatically shift the needle on oil prices, or to call on some key countries such as Saudi Arabia with sizeable spare capacity to step up production and normalize prices back towards the mid-$70s," said Rystad's Bjornar Tonhaugen
However, Rystad believes OPEC+ will stick to its current plan of incrementally increasing supply by 400,000 bpd, opting for a wait-and-see approach.
FGE also believes the producer alliance is most likely to stick with 400,000 bpd but says the group should consider higher levels of up to 800,000 bpd in November.
"Put simply, the OPEC+ coalition has shown it can manage the market when times are tough. Now it needs to show it can manage the transition back to "normal" - and it is dangerous to think of $80-90/b as normal," said FGE.
