Outlook: OPEC+ faces tough dilemma in accommodating Iran
London (Quantum Commodity Intelligence) – The OPEC+ producer group faces tough decisions when it meets this week, seeking to maintain the delicate balancing act of matching oil supplies with returning demand, but also faces the prospect of at least an additional 1 million barrels per day of Iranian oil later this year.
The OPEC+ strategy has largely been deemed a success so far with Brent futures nearing $70/b ahead of Tuesday's meeting, while Middle East benchmarks Oman and Dubai – against which the majority of Middle East crude is sold – are trading around $2/b under Brent.
Not only are prices back to pre-pandemic levels, but monthly average prices for Dubai and Oman were at two-year highs for May.
Quantum's monthly May average price for benchmark Dubai crude was $66.32/b, while DME Oman futures averaged $66.40/b
A price between $60 and $70/barrel is seen as acceptable by the broader producer group, particularly Saudi Aramco, which has been the key architect behind an OPEC+ strategy that was initially implemented in the second quarter of last year.
Any lower and the oil-dependent economies face greater budgetary pressures after finances were decimated in 2020.
However, higher prices incur the risk of competition from the US shale sector.
Demand growth on track
Oil markets during May were battled out between optimism over global demand growth, particularly in the US, against spiraling COVID-19 cases in Asia and the growing likelihood of US sanctions aimed at Iran being lifted in the near future.
OPEC itself remains upbeat on the pace of the demand recovery, saying in its May monthly report, '…for 2021, world oil demand is expected to increase by 6.0 million barrels per day, unchanged from last month's estimate, to average 96.5 million bpd.'
But faced with the prospect of Iranian crude returning the market, OPEC+ needs to agree on a deal that potentially accommodates 1-1.5 million mbd of crude and condensate by year end, including the sale of tens of millions of barrels already in floating storage.
Talks between Iran and the international community initially looked constructive with the market starting to price in the lifting of sanctions.
But talks have hit a number of stumbling blocks and while there have been no deal breakers, final details still need to be ironed out.
Current course set to continue
At the last significant meeting at the beginning of April, OPEC+ agreed to start softening production curbs of 350,000 bpd in May, 350,000 bpd in June, and a further 400,000 bpd for July.
Additionally, Saudi Arabia had made an extra 1 million bpd voluntary cuts, so takes the May-July increase to around 2 million bpd.
Without a clear timetable on Iran, OPEC+ faces a tricky task in setting out any fresh policy for the second half of 2021.
As such, the planned June and July increases are likely to be implemented, but any further decisions deferred until the Iran situation becomes clearer.
OPEC will hold its own meeting on June 24, while OPEC+ will likely meet again at the start of July.
The strategy rebalancing the market and reducing global inventories towards the five-year average has paid dividends so far, but caution will be the watchword for the rest of the year.
