The Crude Report: Opec+ keeping its eye on the prize

Author Argus

Despite growing calls to boost supply more aggressively to help curb rising oil prices, expectations are that Opec+ will once again decide to stay the course and sanction a 400,000 b/d increase its collective output, as planned.

In this episode of The Crude Report, Editor-in-Chief Jim Washer and Dubai Editorial Manager Nader Itayim look at the reasons why the Opec+ coalition is likely to resist change and what challenges it is likely to face in the months ahead.

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Transcript

Jim: Hello everyone, and welcome to this episode of The Crude Report. My name is Jim Washer. I'm Editor in Chief here at Argus, and with me today is Nader Itayim, Editorial Manager in Dubai who'll be joining us for this podcast to discuss what's in store for oil markets from this week's Opec+ meeting.

So Opec+ surprised many with their decision to stay the course and continue with their regular 400,000 b/d per month increases despite growing signs and calls from consumer countries that the market may need more oil. Prices continued to creep up since, and Brent is now come to be about $80/bl, so I guess Nader, the question is, where does this leave the group ahead of Thursday's meeting?

Nader: Thanks, Jim, that's right. So at their last meeting in early October, the group decided to sanction another 400,000 b/d hike in its collective output quota for November. That's pretty much in line with the road map that they'd agreed on back in July. When you say it was a surprise, you're right, in that it came against the backdrop of pressure and really ever growing calls on the group to do more. That's to raise production faster and you know more aggressively than the planned 400,000 b/d, so to help cool the market a little bit. Since then, and we've seen prices continue to rise, sure, albeit you know at a slower rate. But, as an example you know on the day of the meeting, we saw Ice Brent futures cross the $80/bl mark for the first time in around three years. That rose to about $86/bl in the weeks that follows. And Brent has you know, retreated a little bit since, but it remains well above that key $80/bl threshold.

Crude oil prices now comfortably above $80/bl 

So it's little surprise that you know the pressure on Opec+ has actually ramped up since then even further with renewed calls for more production, from not just the likes of the White House but also key consumer countries like India and Japan. The US State Department Energy security envoy, so Amos Hochstein, he actually said last week that Opec+ members should really consider accelerating the pace of their production increases when it meets this week, to take into account strong demand growth, so on and so forth.

Japan's prime minister, about a couple of weeks ago I think, he said you know, it was important to convince major oil producing countries to boost production to tackle the rising oil prices. And finally India's Petroleum Minister, Shri Hardeep Singh Puri, he said at an event a couple of weeks ago that the rising oil prices could effectively undermine the economic recovery that we've been seeing the last few months.

Jim: So quite a lot of pressure there on Opec, which brings us to the next question, what it's looking like ahead of the meeting? Will the likes of the US and India be getting their way?

Nader: Obviously when you speak about Opec, we should always really be prepared for the possibility of some last-minute surprises. But when it comes to this particular meeting, the upcoming meeting, you'd have to say that most things seem to be pointing in one direction. It's looking increasingly likely that despite prices being where they are, and the calls on Opec+ growing louder, the group will essentially once again stick to the script and sanction a 400,000 b/d increase in the production ceiling for December.

Typically ahead of meetings we normally get the sense from speaking with our contacts and listening to ministers that there are you know a number of options on the table for consideration. But as I said, this time there seems to be little to no appetite among the majority of members to consider anything but a continuation of the plan. And what we've been seeing over the past couple of weeks, it's just numerous Opec+ ministers almost lining up to endorse and defend the slow and steady strategy of bringing these increments on every month, that 400,000 b/d, but then no more. The Saudi Energy Minister, Prince Abdulaziz bin Salman Al Saud, I mean, he in particular he's been on the front line over this period to both kind of lead the pushback against all of those pointing the finger at Opec for the current oil prices, but also to really kind of explain why Opec and its partners are doing what they're doing.

Jim: And what exactly is it they're hoping to achieve with this course of actioning? Why is it they're going down this particular route?

Nader: There are several reasons. First off, what Opec+ delegates have been saying and telling us is that this is primarily not an oil problem. Is there a shortage of oil in the system? Some are suggesting yes, particularly given the issue of gas to oil switching over the colder winter months. But the Prince in particular, he was adamant that this is not the case. I mean, he said a couple of weeks ago that Opec+ sees its role extremely limited because the issue is not the availability of crude. Delegates we've been speaking to, they've been saying the oil prices are being supported really by you know, an ongoing shortage of gas and oil, which has encouraged that gas to oil switching I just mentioned in the power industry, ahead of the winter in the Northern Hemisphere. Analysts across the board, they've been predicting that, you know, if temperatures get exceptionally low, this switching could generate anywhere between 500,000 b/d and 1mn b/d of additional demand in the season. For his part, the Prince put that figure around 500,000 to 600,000 b/d. But even so, I mean, that's really still only on the condition of a colder than average winter which they feel is nowhere near certain at this point. As far as he and the group are concerned, whatever demand there is for oil, it's being satisfied.

Secondly, there's the small matter of Covid-19. Multiple delegates have warned us that the threat of the pandemic, it really does still loom large and that the group really shouldn't at any point take the better than expected demand recovery that we've seen so far for granted. In the past couple of weeks, we've seen lockdowns return across the globe. I mean several Chinese cities now have gone back into lockdown. Moscow went back into lockdown a little while ago. And although it's fair to say that the world appears to be managing the pandemic better, to suggest it's now behind us, I mean it would be reckless.

Finally, I mean delegates have been regularly pointing to 2022, multiple forecasts, Opec’s included, they show that we are starting down the barrel of a significant surplus in the oil market next year. According to the latest base case scenario, the OPEC+ group's technical committee, the JTC, last week when they met, they were looking at a base case where OECD stocks will progressively swell next year to stand at around 135mn b/d above the five-year average by the fourth quarter of 2022. And that's under the assumption that Opec+ doesn't really deviate at all from its plan and it sort of continues to add 400,000 b/d to its production quota every month through September of next year, or I mean, later than September if Opec+ decides to pause the hikes for a month or two. They're essentially arguing that expediting that plan will only make the situation worse, which is really something they don't want to even contemplate unless it's absolutely critical.

Jim: Okay, so that's the thinking. Is everyone in the alliance on board here? Any dissent in the ranks?

Nader: From what we've been hearing and seeing, both in public and in private conversations, yes, I think everyone is on board. I mean, there doesn't really seem to be any real pushback against going ahead with the plan. I think it would be fair to say that there's actually quite a strong consensus. As I mentioned a little earlier, in the weeks leading up to the meeting, we've really just seen minister after minister come out to back the strategy and the plan, insisting that there really is no need for additional crude on the market. The Saudis have naturally been front and center, but we've had the UAE Energy Minister Suheil Al Mazrouei a few weeks ago he said he really doesn't feel like there's any real worry about the market overheating. Russian Deputy Prime Minister Alexander Novak, he I think it was last week he said he felt that sticking to the plan was the way to go. And over the weekend we had another three ministers, the Angolan Minister, Kuwaiti Minister, and Iraqi Minister all really saying the same. I mean, there's no need to deviate, their supplies are sufficient, and really you know the cause of the higher prices are shortages of coal and gas, not oil. There are admittedly some delegates out there that we've spoken to who do say Opec+ should try to come out and you know give a message of reassurance to the market, but even they say that the answer here is not more oil.

Jim: Okay. Looking ahead a little, what does Opec need to be careful about? What else is there on the horizon?

Nader: Right, so this is the thing. Although this meeting looks fairly straightforward, there are some potentially thorny issues on the horizon that the group will have to iron out at some point. So first, it's really how to solve the problem of some countries in the group soon being unable really to deliver fully on their shares of the monthly output hikes. And that's as a result of short-term infrastructure issues or longer term field decline, as in the case of Nigeria and Angola, or because of overestimated baselines in the case of Russia. Now, the UAE Energy Minister, he's previously said there is capacity in the group to compensate for those shortfalls if and when they arise. But reaching an agreement on that you know on which countries will compensate for what other countries and by how much. I mean, that's not going to be an easy task.

Second of all, there's the matter of these updated baselines. If you remember in July, five countries, the UAE, Saudi Arabia, Russia, Kuwait and Iraq, they were given new higher baselines in which the respective output cuts would be sort of based on and calculated from, from April of next year. Prince Abdul Aziz he said at the time that two other countries, Nigeria and Algeria had also raised requests for their baselines to be revised upwards. We got that confirmed ourselves, they did make those requests. Now, although those requests were not really dealt with at the time, several delegates have told us that they could actually be revisited and discussed at the group's December meeting. So that's not this one, the upcoming meeting, but the one next month.

Third is the compensation mechanism. This is something that Prince Abdul Aziz kind of introduced last year to try and you know hold countries accountable for not really delivering fully on their pledged cuts. Several members of the group have yet to really make significant inroads on what they owe. But with the world now clamoring for more oil, I mean, there may be question marks as to how seriously these countries you know actually work to clear their debt so to speak. Finally, there's the potential return of Iran to the world oil markets. Look, I mean, it's still very early days, I appreciate that. But we're at a stage now where after many months of you know almost stasis, we appear to have a little bit of movement on the political side when it comes to the revival of the 2015 nuclear deal, the JCPOA, and the lifting of US sanctions on Iran which would come with it.

The Iranians, they said late last week that they'll be ready to return to the Vienna talks in November, and that they'll sort of give a bit more details over the coming days and weeks as to when exactly that would be. But the US Secretary of State Anthony Blinken he almost seems to have stolen his thunder a little bit, the Iranian's thunder a little bit saying in an interview over the weekend that the talks will resume in late November. So it's coming soon, but while the return to the negotiating table, you know after almost five months is a positive sign, it really does need to be underlined and said that first, it doesn't necessarily guarantee that a deal will be reached. And even if it does, I mean it could be another few months at least before it's concluded. But if and when that agreement does come to fruition, I mean we'd be looking at somewhere in the region of maybe 1 to 1.5mn b/d of Iranian oil coming back to the market, which will obviously be another not insignificant headache for Opec+.

Jim: Okay, so the baseline question, the compensation mechanism, Iran, it's actually quite crowded sort of medium term horizon for Opec. Okay, we're kind of out of time, so thank you Nader for taking some time today to discuss some of these issues ahead of this week's meeting.

If you are interested in keeping up to date with our in-depth Opec news and analysis and want to subscribe to Argus Global Markets or Petroleum Argus or indeed both, and you can find more information on these services at www.argusmedia.com. So thanks for tuning in, and we look forward to you joining us for the next episode of The Crude Report.

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