OPEC+ Meeting Ends on Optimistic Note
Negar Sadeqi
The black clouds of covid-19 pandemic that have been haunting the world for more than a year are moving as more and more people are inoculated against the deadly virus. Although uncertainty dominates the market due to lockdown in some European states and the slow vaccination campaign at the global level, global oil demand is forecast to increase in the summer.
That might explain why OPEC member countries and their allies agreed in their April 1 virtual ministerial meeting to gradually lift their output 1.15 mb/d during May, June and July. OPEC+ released a schedule for the upcoming tapering of production cuts for May, June and July, showing the 23-nation alliance would reduce March's 7.05 mb/d in production cuts to 6.55 mb/d in May, and would bring back another 350,000 b/d in output in June, with production cuts reduced to 5.759 mb/d in July.
However, Iran’s Minister of Petroleum Bijan Zangeneh said global oil demand had yet to reach the 2019 levels. He also held out the possibility that oil demand in 2022 would restore to the 2019 levels.
Market Conditions
In its closing statement, OPEC+ approved the adjustment of the production levels for May, June and July 2021, while continuing to adhere to the mechanism agreed upon in the 12th OPEC and non-OPEC Ministerial Meeting (December 2020) to hold monthly OPEC and non-OPEC Ministerial Meetings to assess market conditions and decide on production level adjustments for the following month, with every adjustment being no more than 0.5 mb/d.
“They recognized the improvements in the market supported by global vaccination programs and stimulus packages in key economies but noted that the volatility observed in the recent weeks warrants a continued cautious and vigilant approach in monitoring market developments,” said the statement.
The ministers noted that since the April 2020 meeting, OPEC and non-OPEC Participating Countries in the Declaration of Cooperation (DOC) had contributed to adjusting downward global oil supply by 2.6 billion barrels of oil by the end of February 2021, which has accelerated the rebalancing of the oil market.
Despite agreement by OPEC and their partners to gradually raise output over three months, oil market remains fragile due to continued lockdown in some countries. That along with a historic economic depression in the world pushed OPEC+ to agree to reduce output in April 2020 with a view to save prices.
Some members did not respect their commitments, but Zangeneh said OPEC+ countries honored their obligations in general. He also noted that non-compliance of some producers had elicited criticism from fellow producers.
The OPEC+ statement said the “overall conformity reached 115% in February 2021, reinforcing the trend of aggregate high conformity by participating countries.”
The ministers expressed their thanks to those countries that have submitted plans for previous compensation shortfalls and continue to work towards compensating for overproduced volumes. They urged all participants to achieve full conformity to reach the objective of market rebalancing and avoid undue delay in the process.
Iran Exempt
Asked why OPEC+ agreed on the gradual output increase over three months, Zangeneh said: “In light of successful vaccination on the one hand, and the US’s $1,900 billion stimulus package on the other, participating countries – worried about oil market fragility – decided to increase their May, June and July production by 350,000 b/d, 350,000 b/d and 400,000 b/d, respectively.”
He said that the world economic growth would hit 5%, adding that demand for crude oil would increase by about 5.6 mb/d in light of the revival of business activities. Although global oil demand level in 2020 is 9.6 mb/d down from 2019, oil demand is yet to reach the levels seen in 2019.
“During the 15th OPEC+ meeting, Iran, Libya and Venezuela remained exempt from the agreed production cut because they are producing below their natural right due to the US pressure,” said the Iranian minister.
Satisfactory Conformity
No oil producer would like to see the April 2020 experience repeat itself. OPEC and non-OPEC producers have a bitter memory of that nightmare: sharp decline in oil prices and supply glut. However, the same price shock caused OPEC and non-OPEC to set aside their differences and sit at the negotiating table to reduce output in a bid to help drive up prices. Some analysts predicted that this agreement would not last long, but in practice it was extended for several months in a row. That helped market reach stability which remains fragile. In order to guarantee the market stability, OPEC decided to increase the number of its ministerial meetings from twice a year to monthly so that decisions would be made based on the oil market developments. Never has “time” been of essence in the oil market. Any decision has to be made based on the pace of developments in order to supply market needs.
Although some analysts maintained that monthly meetings would not be effective, it has been over time that the decisions adopted by ministers helped restore balance to the market. One key point with OPEC+ monthly meetings is that member states can make decisions in line with market developments.
In their April 12, 2020 meeting, OPEC+ ministers had agreed to lower their crude oil production by a total of 9.7 mb/d starting from May 1. The initial output cut of 9.7 mb/d will be valid through June 30 this year for two months, OPEC said in a statement at the time. For the following six-month period, from July 1 to Dec. 31 this year, the total output cut would be eased to 7.7 mb/d. This was to be followed by a 5.8 mb/d adjustment for a period of 16 months, from Jan.1, 2021 to April 30, 2022.
This agreement could not take effect in the second phase because of market conditions and the coronavirus pandemic. In its December 3, 2020 meeting, OPEC+ decided to increase production by 500,000 b/d in January 2021.
In its 13th and 14th meetings, OPEC+ agreed on freezing output, except for a total 75,000 b/d by Russia and Kazakhstan (60,000 by Russia and 15,000 by Kazakhstan) for February and March. For April, the shares of Russia and Kazakhstan stood at 130,000 b/d and 20,000 b/d, respectively.
Guarded Caution
Saudi energy minister Prince Abdulaziz bin Salman urged the OPEC+ producers’ alliance to exercise caution.
“Until the evidence of the recovery is undeniable, we should maintain this cautious stance,” he said, adding that global oil demand recovery was uneven in the face of the pandemic hit to economic growth.
“For most part, the market is on a stable footing and stocks continue to draw down,” the prince said.
At the beginning of the meeting, Russia’s deputy prime minister, Alexander Novak, who is co-chair of OPEC+, said that the market had “considerably improved” since its meeting last month. He estimated that demand now exceeded supply by about two million barrels a day, a deficit that would lead to a rapid draw down of inventories, potentially leading to higher prices.
Angolan Minister of Mineral Resources and Petroleum Diamantino Pedro Azevedo, the rotating president of OPEC, echoed this sentiment, saying that "despite the light we can see on the horizon, we must be aware of the clouds that remain", and pointing to ongoing travel disruption as a result of the pandemic.
Market Trusts in OPEC+
Saudi Arabia had announced in its last month meeting that it would cut 1 mb/d from its production voluntarily. The voluntary production cut by Saudi Arabia affected the market and improved prices. Prince Abdulaziz said this time his country would gradually increase its output because the previous cut was voluntary.
Fereydoun Barkeshli, senior energy analyst, said in an interview with Iran daily newspaper that the market’s confidence in OPEC+ seems to have been boosted.
He said that OPEC had set the lowest price at $60 in December 2020, but currently it sets the ceiling between $60 and $70. He said that the market confidence was supporting price rally.
Goldman Sachs said it was still bullish on oil and anticipates strong demand that would require OPEC+ putting another 2 mb/d on the market in the third quarter, after around 2 mb/d that the alliance and Saudi Arabia decided to return between May and July.
“We forecast a larger rebound in oil demand this summer than OPEC and the IEA, requiring an additional 2 mb/d increase in OPEC+ production from July to October,” Goldman Sachs said.