The Crude Report: Opec+ keeps markets guessing

Author Argus

Between SPR releases and Omicron, uncertainty was the underlying theme of last week’s monthly Opec+ meeting. And although they sanctioned another 400,000-b/d increase to their production quota in January, Opec+ ministers signaled they’d be watching developments closely and be ready to change course if needed.

In this episode of The Crude Report, Editor-in-Chief Jim Washer and Mideast Gulf Editor Nader Itayim, discuss the outcome of the meeting, the thinking behind the decisions taken, and the latest in the race to be Opec’s next Secretary General.

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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, once again, is Nader Itayim, editorial manager in Dubai.

And we're going to be talking today about last week's fascinating Opec+ meeting which took place, of course, against the backdrop of both planned strategic stock released for the US and other consumers, and growing global fears over the impact of the new Omicron Covid-19 variant.

So we're gonna be looking at the decision Opec took on output policy for January, the rationale behind that decision, whether it was the right move given market conditions, and also where politics, both internal and external, fitted into the whole debate. So, Nader, to kick off, remind us, first, what exactly did Opec decide last week?

Nader: Thank you, Jim. Right. So there were two main things here.

First, there was a decision. So what Opec and its partners ultimately agreed to do late last week, it was to essentially stay the course and sanction yet another 400,000-b/d increase in, you know, the group's collective production quota for January. That's now the fourth time that the group has met and confirmed that course of action since, you know, agreeing on that wider roadmap back in July, to gradually return all the production it took off the market last year in response to Covid, and, you know, the collapse in oil demand that it caused.

Just as a reminder, under that roadmap, Opec and its partners, they bring back 400,000 b/d to the market every month, from August until April next year, and 432,000 b/d from May 2022 onwards, essentially until all of that oil is back onto the market. The ministers now essentially meet on a monthly basis to confirm whether or not any changes need to be made.

Now, unlike though the three previous times that they decided on this course of action, this time there was a difference. There's sort of a new line in the communique. There was something we hadn't really seen before. And that was, "The meeting shall remain in session pending further developments of the pandemic and continue to monitor the market closely and make immediate adjustments if required." So, this is essentially the second element decision. And frankly, I think it's the most interesting one.

What does it mean? In essence, 2nd December, the meeting had never actually formally ended. There was no presser. It's as if they simply sort of took a break to leave themselves, you know, open to reconvene immediately at any point over the coming weeks to, you know, make any change to policy if required. We were told by two delegate sources on the day that this was an addition that was, you know, put forward by Oman, one of the sort of bigger non-Opec players in the group, to act as a kind of safety net or a buffer in case things go south.

Jim: Okay. So sticking with amount increases, but as you say, with this fascinating sort of change on previous practice and the meeting kind of left open, what's the rationale for them to do this?

Nader: So, one of the more, you know, unique elements of this particular meeting was the sheer uncertainty that existed going into it. Typically, with just days to go to these meetings, you begin to get a sense of what the group is leaning towards. Maybe not the decision itself, but something close to it. But this time, with the meeting coming, as you said, just one week after not just the announcement by the US of this coordinated planned SPR release alongside these other key consumer countries, but also the emergence of this new Omicron variant, things were very much up in the air going into these meetings. I remember telling colleagues and contacts going in the days running up to the meetings that for the very, very first time in a very long time, I genuinely didn't know which way the meetings would swing, I mean, what's going to happen. And I think that uncertainty was reflected strongly in what they ultimately did and how they went about it.

And staying the course, Saudi Arabia, Russia, and the rest of the Opec+ group, they're essentially betting that this new Omicron variant is not really as bad as people are saying. That the impact on demand will essentially be muted. So Saudi Arabia's Energy Minister Prince Abdulaziz, he hinted at this, I mean, in some comments ahead of the meeting. He said that he was really concerned about the impact of Omicron. But also in leaving the door open for the discussion, this whole thing about the meeting remaining in session, the point here was to introduce some kind of flexibility to the system to deal with these uncertainties. You know, when it comes to the SPR release, the uncertainties over the timing of the release, let's say. And with Omicron, the uncertainties over the impact that it will have.

Opec+, it ultimately felt it didn't really have enough information to confidently take a decision one way or another on whether a change in course was really required at this point in time. I remember saying it on the day, Opec before and Opec+ now, it doesn't really work on hunches. So they held off for now, stayed the course, but left the door open for any further changes if required.

Jim: Okay. So they tried to be careful, they tried to be flexible. We've seen how the market responded. Did they get this decision right?

Nader: Right. So I think the first thing I need to say here is this isn't really the first time that they've done this, they've acted this way, in the sense, you know, to kind of hold tight and refrain from taking any decisions until they have a full picture of what's happening. There have been some in the past who have called Opec+, you know, reactionary and slow. But to be perfectly honest, I mean, given their track record over the past year or so, you'd have to say what they've done it's been right on the money. They've done a pretty remarkable job of managing the market and sort of navigating this whole period, despite the huge supply and demand-side uncertainties over this entire 18 months.

And if you look at the price reaction, again, I mean, it seems to have done the trick. Despite putting forward a decision to, you know, raise out the quotas again, prices actually rose in response. I mean, not by too much, admittedly, but still, the market saw, okay, I mean, this is a 400,000-b/d increase that was agreed for January, but with the way it was done, that may not essentially be the end of the story. So, I mean, the thinking here was to steady the ship, continue as is until we know the full impact of what it is exactly that we're dealing with. And once things become clearer on that front, they can then, you know, take advantage of this kind of fast response structure mechanism that they put in place to react, if needed. In effect, I mean, Opec+ sort of keeps the market guessing a little bit longer.

So IMF's Managing Director, I saw that she said over the weekend that, you know, she expected Omicron to downgrade their own growth projections and sort of dent the recovery. But at this point, that's fine. That's all well and good, but we're just not really sure by how much. Realistically, even if it's ultimately not deemed to be as big a threat, say, as the Delta variant before it, this current window of kind of renewed flight restrictions that we're seeing, the border closures in some places, this is absolutely going to hit what was a steady, albeit, you know, slow recovery in jet fuel demand.

And I also wanted to touch on the safety measure that they introduced here. Some say that, you know, it's just semantics and fancy wording. In a way I'm inclined to agree. Because it doesn't really give the group any more tools than it already had. I mean, the whole beauty of this Opec+ framework, particularly in this age of, you know, virtual meetings, is that it can always convene in record quick time and take decisions on policy changes if and when required, no delays. Does this additional point about leaving the meeting in session change that? No, it doesn't. But, and even if it's just semantics, you have to admit it was an intelligent move that even the market took notice of. The price reaction, again, it shows that. All in all, I think I'd have to say yes.

Jim: But as we've said, there's been a lot of politics in the air around Opec output policy in recent months, pressure in particular from Washington. Now there's 50mn bl US stock release happening early in 2022. What role do you think politics played in Opec's decision-making last week?

Nader: When it comes to Opec, I think it's fair to say that, you know, politics, geopolitics, they always have some part to play. Now, when you look at the current Opec+ strategy, it's been increasingly focused on the longer-term gains, especially in recent months. Regarding the US and its recent lobbying, some see the latest decision by Opec+ last week as a kind of an olive branch to ease the tensions with the US that began to bubble under as crude prices continued their ascent to was a three-year highs in October.

The US essentially wanted more from Opec+, Opec+ insisted that it would do what it thinks is the best. And the US ultimately responded with the announcement of the SPR release. The White House last week, I mean, it essentially welcomed the results of their first meeting. It said that should help facilitate the global economic recovery alongside the coordinated stock release that's soon to come.

But staying the course, it also ensures that Opec+ doesn't really hand over market share to destocking. The US and the White House, they've said on numerous occasions that it's not really going to reconsider its plans to draw these 50mn bls of crude from this SPR. But the US Energy Department, it has admitted I think in the last week that it could adjust the timing of the drawdown depending on price movements. By not changing course, there's also the added bonus of not really being seen to bend to US pressure.

At the same time, just moving beyond the US for a second, it also kind of appeases the Opec+ member countries that have spare capacity. Those countries that have previously really been pushing to increase production. The UAE, Russia, these are countries in particular that have been doing that, although Russia doesn't really have that much spare capacity. A quick decision to extend the deadline for its compensation scheme by six months till the end of June next year, that not only really secures the theoretical market share of this group, but it also keeps the group unified. For anyone unfamiliar, I mean, this compensation scheme, it's one that was thought up by Saudi Arabia last year, which essentially asked countries to make up now for cuts they failed to deliver on, you know, earlier in the lifetime of this deal.

But you have to say, you know, pressure to deliver such compensatory cuts, that's really eased in recent months as some of these group members struggled to meet their higher quotas because of stalled or declining capacity. In the first three months of this latest agreement, for example, that's August, September, and October, based on our own numbers at Argus, Opec+, at least those countries that are actively participating in this deal, they only really brought on just over half of the 1.2mn b/d they were supposed to.

Jim: Okay. So one final question, away from matters of output policy, Opec also has to choose a new secretary-general next year, and there was some discussion of that last week as well. How is that debate shaping up?

Nader: That's right. Yes. So while the Opec+ meeting on the 2nd of December was focused on, you know, the market and production policy, the Opec meeting on the 1st, that was more geared to administrative issues, things like long-term strategy, budgets, etc. But the one item on the agenda that stood out that day was this item, this race to succeed Barkindo as the group secretary-general once his second and final three-year term ends next summer. I mean, his tenure began in June 2016. So his tenure ends roughly around that time in June 2022.

Going into the meeting, there was only really one contender for the post, Haitham al-Ghais, that's Kuwait's former Opec governor who acted as the very first chairman of the Opec+ Joint Technical Committee, or JTC, which, you know, studies market conditions ahead of the OPEC+ ministerial meetings. Delegates in that meeting, they told us that, you know, al-Ghais received stronger support from Saudi Arabia, which, as we all know, is incredibly important, but also several other delegations. There was actually intent to push forward and take a vote there and then on this on the issue, but Iraq stood in the way of that on the day and it asked for, you know, further time for other candidates to step forward.

Several delegates suggested at the time that Iraq had indicated it wants to put forward its own candidate, but it never actually named the nominee. So it was decided then that Opec will hold an extraordinary meeting next month in January, immediately before the broader Opec+ monthly meeting that's scheduled for 4th of January, to address that issue in particular, and essentially to take a vote. The Opec statute, the latest one, it actually says that the election of a secretary-general, it requires unanimous support. But two delegates we spoke to after last week's meetings, they told us that the members have all agreed to scrap that in favor of a majority vote. There hasn't really been any additional movement on the issue or any new candidates going forward since the meeting last week, but we heard in recent days that we could see at least a few candidates emerging not just from Iraq, but also possibly even Libya, Venezuela, or Iran. So it's definitely one to watch over the coming weeks.

Jim: Okay. Plenty for us and appropriate to think about, I think, there as the year draws to a close Thanks, Nader, and thanks for your time today as ever. If you want to keep up to date with our in-depth Opec news and analysis, then why not subscribe to Argus Global Markets or Petroleum Argus, or both? 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 on the next episode of The Crude Report.

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