OPEC and its allies will meet on Monday, 4 January to set crude production levels for February, with the spread of new COVID-19 variants potentially giving ministers pause on proposals to increase output.
The coalition, now meeting monthly, is already easing its production quotas by 500,000 b/d for January, hoping that slightly loosening the taps will not upend the fragile oil price recovery fostered by their historic output cuts since spring.
But some officials say it may be too early to consider a further tapering of the cuts, as some countries have pushed for, with the emerging virus strains likely to weigh on global oil demand and the full deployment of coronavirus vaccines still several months away.
OPEC Secretary General Mohammed Barkindo, speaking at a delegate-level advisory committee on 3 January, offered conflicting signals, saying the alliance’s members were ready to usher in a “gradual return of 2 million b/d to the market over the coming months” but adding that the outlook for the first half of 2021 was “very mixed, and there are still many downside risks to juggle.”
One delegate said the committee, which met for about eight hours, largely agreed that a proposal floated by Russia for another 500,000 b/d increase in February should be parked for now.
But the delegate, who spoke on condition of anonymity, stressed that ministers will have the final say on the matter, with many hours of talks to come. Committee recommendations have sometimes been ignored at previous meetings.
“This is not a clear recommendation, but it a consensus” that quotas should be rolled over for February, the delegate said.
A ministerial monitoring committee, co-chaired by Saudi energy minister Prince Abdulaziz bin Salman and Russian Deputy Prime Minister Alexander Novak, the country’s primary OPEC+ envoy, will convene virtually at noon Vienna time (1100 GMT), followed by the full OPEC+ meeting at 3 pm (1400 GMT).
Deciding When to Taper
Analysts appear split on the meeting’s outcome, which will set the tone for the oil market in early 2021.
Yousef al-Shammari, who heads the consultancy CMarkits, pegs a 70-90 percent chance that the alliance agrees to Novak’s plan to release 500,000 b/d more crude in February, noting that oil prices did not fall after the deputy prime minister announced his proposal over Christmas.
With Brent crude ending 2020 trading at US$51.75/b, within Russia’s acceptable range of US$45-$55/b, the market likely can absorb that modest increase, Shammari said.
“I don’t think prices will come down in the case of 500,000 b/d of extra supplies,” he said, though he added that the new COVID-19 variants “could make [OPEC+] a little cautious.”
However, Helima Croft, head of commodity strategy at RBC Capital, said the producer bloc will likely forgo any output increase.
Given the slow ramp-up of vaccines and the scrambling by many countries to get skyrocketing infection rates under control with renewed lockdown measures, OPEC+ will “adopt a wait and see approach before fully recommitting to the original tapering timeline,” she said in a note.
The OPEC+ group, which controls roughly half of global crude production capacity, was scheduled to relax its 7.7 million b/d in collective cuts to 5.8 million b/d in January, but a week of intense talks leading up to its Dec. 3 meeting resulted in a deal to scale them back much more modestly to 7.2 million b/d.
Ultimately, the goal is to get the cuts down to 5.8 million b/d by mid-year, in up to 500,000 b/d monthly increments, as market conditions warrant.
Prince Abdulaziz, who strongly advocated for continued production restraint at the last OPEC+ meeting to prevent prices from backsliding, has been mum on his position, saying only after a meeting with Novak in Riyadh on Dec. 19 that he wanted to keep market speculators guessing.
Also on the docket for OPEC+ is the adjudication of so-called “compensation cuts” owed by countries that previously violated their quotas.
As of the end of November, five OPEC members and six non-OPEC countries had to make a combined 2.557 million b/d in cumulative catch-up cuts, led by Iraq, which owes 589,000 b/d, and South Sudan, which is 363,000 b/d in arrears, according to an internal OPEC+ document seen by S&P Platts.
Raising quotas would make it easier for that compensation to be carried out, but many compliant members want assurances from quota busters that their freeloading ways are over.
The coalition must also factor in outlooks for members Libya, Iran and Venezuela, which have been exempt from quotas.
The many moving parts and competing agendas have led to many recent OPEC+ meetings dragging on for hours. The alliance hopes that the monthly meetings will help smooth their market management.
In his remarks to delegates on the advisory committee, Barkindo urged unity in the cause of rebalancing the impaired market. “The open questions about the future point to the need for … participating countries to stay the course and remain faithful to our commitment to full conformity, and to compensate for earlier overproduction,” he said.