The Crude Report: Opec+ looks at 2021

Author Argus

Opec+ ministers will meet w/c 30 November to discuss next steps for their production agreement, the decisions of which will obviously have impacts on global crude oil trade flows.

Sean Cronin, the editor of Argus Global Markets, presents this latest episode of The Crude Report.

Transcript

Jessica Tran: Hello and welcome to The Crude Report, Argus' podcast series on global crude oil markets. This is Jessica Tran for Argus.

Ministers from Opec and its non-Opec allies, also known as Opec+, will meet next week to discuss next steps for their production agreement, these decisions of which will obviously have impacts on global crude oil trade flows. With me to delve deeper into this is Sean Cronin, the editor of Argus Global Markets, a weekly report that covers oil derivatives, arbitrage, market fundamentals, and global trading. Hi, Sean, thanks for joining us today.

Sean Cronin: Thank you, Jessica.

Jessica: So, what are the market conditions leading up to the Opec meetings?

Sean: So oil prices have been on the rise this month, and the big factor behind that move are advances in testing announced by Pfizer and Moderna and AstraZeneca. They've reported success rates of around 90% in clinical trials, and it's generated a great deal of optimism that there's an end in sight to the economic disruption we've all been undergoing because of Covid-19 lockdown measures. So what impact that's had on the oil markets is a rise in crude prices of about $5/bl over the last two weeks. So things appear to be looking up from the point of view of Opec producers, but there are still very big questions about how quickly these new vaccines can be distributed and how widely available they will be.

So, most forecasters don't assume mass vaccination before the middle of next year. And oil market conditions right now are, in fact, actually, relatively depressed in the near-term despite this price rally. So you have a proliferation of lockdown measures, particularly in Europe, to deal with the second wave of Covid-19 infections. And that's limiting economic activity. It's limiting demand for transport fuels. And in addition to that, there's the rapid return of about 1.2mn b/d of Libyan oil production over the last two months. And that's really tipped the oil market a little bit further out of balance.

Jessica: So, these are obviously a lot of factors to consider. How do you think Opec will use these factors to make their decisions at these meetings?

Sean: Well, so under the current Opec+ production agreement, the members are scheduled to be allowed to increase output by nearly 2mn b/d in January, but there are major doubts now that this will go ahead as planned. The production deal itself was drawn up in April this year when the oil market was rapidly crashing. And the size of the cuts was huge – 9.7mn b/d to start with – and it was a big achievement to get agreement on it. And the fact that they agreed to run the production agreement for two years was also a pretty big achievement.

So the signatories planned two changes to the production level over the lifetime of the deal. And the first one happened back in July, when quotas rose by nearly two million barrels a day. But this rise, the second wave of infections, and the return of Libyan production, it leaves very little room in the market for an extra 2mn b/d of oil from January.

Jessica: So has Opec+ as a group or any of their individual members given any indication of what they will decide?

Sean: Good question. Not formally, no, but it would be a big surprise if they stuck to the current schedule. So the coalition has, by and large, been quite realistic about how much of its oil the world can absorb, and it's been flexible when it needs to be. So the first stage of the production agreement, that's the 9.7mn b/d cut, was meant to last for just two months, but ministers extended that level for a month when they realized that prices were not recovering as quickly as they thought they would. And the language out of various delegates and sources at the moment suggests that they will roll over the current higher level of cuts, that's the 7.7mn b/d level of cuts after the new year. And then now, it looks as if the key question facing ministers when they meet is whether that extension will run for three months, or whether it will run for another six months.

Jessica: So what are the pressures that the group is seeing on each side of that decision, of the cut decision?

Sean: Well, the Opec+ arrangement has existed largely as a way to allow Russia and Saudi Arabia to cooperate on production, ever since they agreed the first cuts began in January 2017, but there's always been a tension to a degree because Russia has always been a reluctant partner of the two and has a very vocal and influential group of producing companies that are feeling held back by these centrally-imposed production limits. Now, Russia has tended to be more resistant to extending production agreements. And if you go back over the last three years, it almost always produces more than its agreed quota. If there's going to be some resistance to a six-month extension, it might come in from Russia.

Jessica: So Opec+ as a whole has produced roughly what it said it would under the May agreement. But like you mentioned, not all countries have been sticking to their quotas. What is the group overall doing about this?

Sean: Yes, so the group as a whole since May has been producing at about 99% of their production levels, if you take the average of the full length of the deal so far, but not all the countries are pulling their weight. And Saudi Arabia, in particular, has been very unhappy about this. So at its insistence, the group put in place a compensation scheme last summer where countries that produce above the quota in the early months of the deal are meant to produce below their quotas in subsequent months to make up the difference. And it applies to many countries, but the biggest quota busters, if you like, in volume terms have been Iraq, Russia, as I mentioned, South Sudan, Gabon, and Nigeria. And this compensation scheme that is supposed to run until the end of this year. But at this point, it looks extremely unlikely that these countries will be able to cut by enough to clear their balance sheets of the overproduction from earlier. The likely outcome is that the compensation mechanism will have to be rolled over into 2021. And, of course, keeping to this higher cuts level, the 7.7mn b/d cuts level, will make it harder in turn for these countries to repay their production debt.

Jessica: For direct access to similar in-depth coverage on issues that affect global oil markets, consider subscribing to Argus Global Markets. You can find more information on this service at www.argusmedia.com. Thanks for tuning in. And we look forward to you joining us on the next episode of The Crude Report.

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