Market Forces: Opec-Plus Shows Path to Exit

The Brent price seems happy in its new $60-$65 per barrel range, even though it is flopping around within the band. The explanation for a rise or fall in the price is invariably a reference to the Apr. 1 Opec-plus decision to slowly increase oil production. A price fall, the pundits say, signals that too much Opec-plus oil is coming to market. A price increase is explained by Opec-plus restraining rising production enough that inventories are still draining. Whatever the reason, the price band signals that Opec-plus guidance on output growth creates a floor of $60 but caps rallies $5 higher. The price band shows the market is in a volatile holding pattern and is still weighing whether producers have done enough. But for the first time since Opec-plus started closely managing this market a year ago -- when oil demand collapsed on efforts to keep the Covid-19 pandemic under control -- producers are getting close to wiping out surplus inventories. The 23 countries under the Opec and non-Opec umbrella -- 19 of which have an output quota -- have already rebalanced the crude market and are now draining refined product tanks (EC Feb.12'21). They agreed to add a total 2.14 million barrels per day in new oil production through July in roughly equal steps (EC Apr.2'21). Crucially, as part of that deal, typically conservative Saudi Arabia is reversing its voluntary cut of 1 million b/d in three stages. In case forecasts disappoint, the Opec leader can delay its tapering. That it went along with others to add more oil can be seen as a vote of confidence that oil demand is set to return. Notably, Opec-plus' decision to increase output also followed a phone call between US Energy Secretary Jennifer Granholm and Saudi Energy Minister Abdulaziz bin Salman, during which they discussed the importance of "affordable and reliable" energy sources of energy for consumers," Granholm said via Twitter (OD Apr.1'21). Bank JPMorgan said it had expected Saudi Arabia to only bring back its 1 million b/d from July, “once it received more tangible confirmation that demand has all but fully recovered.” That was the biggest surprise of the meeting, the bank noted. Slowly Back to Normal At the end of the three-month path follows a summer with high oil demand -- the result of vaccine rollouts, stimulus spending and warm weather pushing social life and travel closer to pre-pandemic levels. Energy Intelligence sees consumer demand at nearly 99 million b/d in the second half of the year, just 2 million b/d below the second half of 2019 and 4 million b/d higher than the second half of 2020. Oil demand is set to grow close to 2019 levels in 2022, allowing Opec-plus to bring more oil to market. The thinking is that additional Opec-plus crude oil volumes coming to market over the next three months are low enough for inventories to continue draining at an average 1 million b/d in April and May and empty out from June at double that rate. Energy Intelligence balances also signal that summer demand can take care of much of the surplus inventories in refined products. A key signal for the Opec-plus output policy going forward will be refinery margins. The global margin tracker from bank Credit Suisse shows that profitability for refiners is recovering. The US Energy Information Administration expects US gasoline demand to increase by 15% this summer. August gasoline use in the US is seen at 9.1 million b/d, which is 600,000 b/d higher than in 2020, but still down from 9.8 million b/d in 2019, the EIA says in its summer outlook this week. Bears on the Path Opec-plus has made huge progress taking excess inventories off the market. Key trading hubs in the US, Europe, Japan, Singapore and the United Arab Emirates have given back nearly all the surplus crude and product stocks that built up at the start of the pandemic. But commercial product inventories globally are 285 million bbl higher than December 2019, just before the pandemic spread, although these are coming down fast. Energy Intelligence inventory data shows that the product surplus is mostly in China, which domestic consumption and product exports should narrow, with some in India. But the tide might turn with too much crude oil coming again. Opec members Iran and Libya, both exempt from quotas, have been ramping up production. And Iran could yet open the floodgates should the indirect talks between Washington and Tehran on the US' return to the 2015 nuclear deal that began this week in Vienna bear fruit (related). Already, Iran’s crude production is 400,000 b/d higher than December while Libya has added 800,000 b/d since October. Each could add another 400,000 b/d through the end of the year, and Iran more, if it and the US strike a deal. In that case, Opec-plus would have to go slower on adding production to the market, unless demand takes off faster than expected (EC Feb.26'21). John van Schaik, New York