Opec+ likely to stick to the script

The Opec+ alliance looks likely to press ahead with a further 400,000 b/d increase in crude production in November, despite rumblings from countries inside and outside the group that a larger quota hike may be needed to help cool the market.

Ministers from the coalition meet on 4 October against a backdrop of rising oil prices, with Ice Brent futures breaching the $80/bl mark in intraday trading earlier this week for the first time since October 2018. But several Opec+ delegates have told Argus that they expect ministers to stick to the script regardless. "I think it should be an easy and smooth meeting," one delegate said. "I believe we should and will stick to the plan to increase production by 400,000 b/d."

Opec+ agreed in July on a roadmap to raise its collective output ceiling by 400,000 b/d each month from August to April next year, and by 432,000 b/d a month from May 2022 until last year's cuts are fully unwound. The increases must be rubberstamped at monthly ministerial meetings, and can be paused for up to three months if market conditions warrant it.

The sustained rise in oil prices and a rapid drawdown in inventories have triggered renewed calls — most notably from Washington — for the group to consider restoring production more quickly than planned. "We continue to speak to international partners, including Opec, on the importance of competitive markets and setting prices, and doing more to support the recovery," the White House said on 28 September. White House national security adviser Jake Sullivan said in early August that the 400,000 b/d monthly increment "is simply not enough".

Even some Opec+ members are questioning, among themselves, whether a 400,000 b/d addition in November will be sufficient, particularly given the potential for surging European gas prices to prompt gas-to-oil switching in the power and heating sectors. The group's Joint Technical Committee (JTC), which reviews market conditions ahead of the ministerial meetings, noted this week that "tightness in the gas market could further drive demand for substitute fuels ... should winter be colder than normal".

The latest JTC document, seen by Argus, presents two scenarios on supply and demand in 2021-22. The base case adopts forecasts contained in Opec's most recent Monthly Oil Market Report, in which demand is seen growing by 6mn b/d this year and a further 4.2mn b/d next year, while global supply increases by 1.9mn b/d in 2021 and by 6.6mn b/d in 2022. An alternative scenario envisages lower demand growth — 5.4mn b/d this year and 3.7mn b/d next year — and a bigger increase in supply — 2mn b/d and 6.8mn b/d respectively.

In both cases, it is assumed that Opec+ sticks to its planned production adjustments and that deal-exempt members Iran, Libya and Venezuela produce at August 2021 levels. The base case leaves OECD commercial stocks 106mn bl below the 2015-19 average at the end of this year and 68mn bl above by the end of 2022. Under the alternative scenario, inventories end this year 37mn bl below the five-year average and finish next year 295mn bl above.

Easier said than done

While a decision to stay the course may appear counter-intuitive in light of current market conditions, it would be consistent with the group's tendency for caution — a strategy that has paid off since it embarked on its latest market management challenge last year. But more importantly, it could prove to be the path of least resistance. Several Opec+ ministers and delegates have warned in recent months that some member countries may struggle to deliver on their share of the monthly output hikes as the group gets closer to the finish line.

Judging by August production figures, this may already be an issue. Argus estimates that the 19 countries participating in the deal raised their combined production by just 100,000 b/d in August, a quarter of the planned hike. Several countries, including Nigeria, Angola and Malaysia, fell substantially short of their quotas. "It would be difficult to decide on a larger increase because not all countries would be able to deliver," said one delegate.

By Nader Itayim and Ruxandra Iordache