Price surge hinges on output cut extension
A report prepared by an Opec+ panel said the rebound in global oil demand next year would be less than previously thought as the coronavirus second wave continues
The Opec+ alliance led by Saudi Arabia and Russia, which is pondering a delay of the supply boost planned in January by up to six months, hopes to see oil prices stablising far above the current level of $43 a barrel subsequent to oil inventories declining further in 2021.
The 23-nation oil producers’ alliance had plans to ease some of the unprecedented supply curbs introduced in May to offset the collapse in demand, restoring two million barrels a day of output at the start of next year.
But weakening demand has prompted the alliance to consider delaying the increase.
Following a crucial meeting on Tuesday, a report prepared by an Opec+ panel, known as the Joint Technical Committee, said the rebound in global oil demand next year would be less than previously thought as the coronavirus second wave continues.
“For 2021, oil demand is expected to grow by 6.2 million barrels per day, year on year, representing a downward revision of 0.3 million barrels per day compared to last month’s assessment,” the report said.
The report said if oil cuts were extended to the end of March 2021, OECD commercial inventories will decline to stand at 73 million barrels above the five-year average in 2021.
If the reduction pact was extended to the end of June, OECD stocks would fall and stand only 21 million barrels above the five-year average next year, according to another scenario.
The level of oil inventories in industrialised OECD countries relative to their five-year average is a key benchmark for Opec+.
Given the demand slump and current level of inventories, Opec+ members have acknowledged that easing of output curbs by two million barrels per day look unfeasible. Instead, the producers look set to keep about 7.7 million barrels a day -- roughly 8.0 per cent of global supply -- off-line for a little longer.
Analysts said deferring the supply boost - and thus supporting prices - may be critical for Opec+ nations, many of which need oil prices far above the current level of $43 a barrel in order to cover government spending
Saudi Arabian Energy Minister Prince Abdulaziz bin Salman said on November 9 the producers can “tweak this agreement” as required. Algeria, which holds Opec’s rotating presidency, and group secretary general Mohammad Barkindo made similar remarks.
“The lockdowns in Europe and what that will mean for demand will be very much on their mind,” Daniel Yergin, vice chairman at IHS Markit, said in a Bloomberg Television interview. “The easiest thing for them to do, and as President Putin signaled, is to roll it over.”
Any move by Opec+ to extend the cuts beyond January will be received favorably by the market and should lift oil prices, analysts said.
“This is the wrong time to be increasing crude supply,” Bob McNally, president of consultant Rapidan Energy Group and a former White House official, said in a Bloomberg television interview. “They really almost have no choice now but to postpone. The demand pullback in Europe is frightening.”
Bjornar Tonhaugen, Rystad Energy’s head of oil markets, said oil prices took a blow and briefly reversed the gains, when a leaked Opec document revealed the group’s pessimism for oil demand next year.
“But the brief hit from Opec’s pessimism quickly turned into renewed confidence that the alliance will take action to address the grim demand scenarios and protect the market from extra supply,” Tonhaugen.
He said the current Opec + agreement opens for an increase in production, with the collective target output rising by 1.9 million bpd from 36.2 to 38.2 million bpd from the start of January 2021.
“Under the dire market circumstances, the group is widely expected to issue a recommendation for an extension of the current output curbs by up to six months through June 2021,” said Tonhaugen. A final decision on this will be taken by the upcoming Opec+ policy meeting on 30 November/1 December.
“In reality, we believe Opec+ would be able to hold back only 1.6 million bpd of the 1.9 million bpd target increases, as countries such as Iraq and Russia are already producing above their current targets,” Rystad Energy’s analyst said.
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