Opec-Plus: New Deal Must Control Market in 2022

• Balances show Opec-plus can open taps next year but will need a new production deal when the current one expires at the end of the first quarter of 2022. • A new deal is needed to divvy up the remaining spare capacity equally among members. Further, an earlier deal might be required if quota-exempt Iran strikes a nuclear deal and lifts output. • Non-Opec partners in the deal are getting close to full capacity in 2022, which leaves Opec in the driver’s seat. Russian tax benefits should lift domestic upstream spending. A first look at 2022 shows that Opec-plus can open the taps in 2022. Demand is set to grow another 2.5 million barrels per day in 2022, on top of the 5.7 million b/d this year. Non-Opec supply is forecast to add 1.2 million b/d in 2022. That leaves Opec-plus a direct 1.3 million b/d extra output to fill the gap. In addition, however, inventories in 2022 won’t need to drain as much as this year to support prices. For 2022, stocks draining 600,000 b/d is thought to be enough. That’s a big relaxation from 2021 when inventories are expected to drain 1.8 million b/d. It gives Opec-plus another 1.15 million b/d for an extra 2.4 million b/d in 2022. This could ultimately be far less if Iran is coming back to market at close to full capacity. Simple math says Iran would take at least 1 million b/d from that growth in case the US lifts sanctions. Such a floodgate return would still leave Opec-plus in full control of the market in 2022, especially in the second half of the year when oil demand is forecast to blast beyond 2019 levels. The Energy Intelligence forecast sees demand growth stagnating in the first half of 2022 as the world will still need to deal with the pandemic, but we expect a resumption of more international travel in the second half. Balances reckon Opec-plus can produce around 38 million b/d of crude from now through the first quarter of 2022 to eradicate the market impact of Covid-19. It can add much more after that, but this will require an extension of the current deal that runs through end-March 2022. The wild cards remain Iran and Libya. Fading Covid-19 Reshapes Global Oil Balance (million b/d) Q1'22 Q2'22 Q3'22 Q4'22 2022 Demand OECD-34 44.4 46.0 47.7 47.3 46.4 Non-OECD 53.3 52.8 54.2 55.1 53.9 Total Demand 97.7 98.9 101.9 102.4 100.2 Supply Opec Crude 27.3 27.6 28.3 29.0 28.1 Opec NGLs 5.3 5.2 5.2 5.3 5.3 Non-Opec 62.7 63.6 65.0 64.8 64.0 Processing Gain 2.3 2.3 2.3 2.3 2.3 Total Supply 97.6 98.9 100.9 101.4 99.7 Stock Change -0.1 0.0 -1.0 -1.1 -0.6 Source: Energy Intelligence Checking the Spare After years of relinquishing market share, Opec-plus can carve out more space. That means Opec can start producing oil now plugged up at the wellhead. Spare capacity in Opec alone is seen at some 7.2 million b/d in April, perhaps around 6.5 million b/d in May. This excludes the 1.4 million b/d currently seen for Iran. Spare capacity is defined as oil that can be brought on within one month and produced for at least three. Non-Opec partners Russia and Kazakhstan also have spare capacity. This is estimated at close to 1 million b/d for Russia and 100,000 b/d for Kazakhstan. If indeed Iran can come to market at full blast, other producers will have to make room for Tehran’s return, and that includes non-Opec partners in the Opec-plus alliance. They have done the same for Libya when the latter added 1 million b/d at the end of last year. The weighting in the alliance shows that Opec members have to offset two of every three barrels that Iran adds, while non-Opec members should offset one in three. Growing Non-Opec-Plus Producers outside the alliance can produce at will. The US, Canada, Norway and Brazil are expected to add output. Including fast-rising natural gas liquids, they can add an aggregate 1.2 million b/d. The upstream trends that came more in focus during the pandemic continue to gain shape in 2022. Oil firms continue to limit upstream capital spending as they restore balance sheets and rethink their oil and gas portfolios in the energy transition toward a low-carbon world. The US remains pivotal. The world’s focus is on shale oil companies. They stick to financial discipline, which means they will not outspend cash flow. Extra money goes to reducing debt and paying dividends. Yet they continue drilling. Crude oil production is set to grow again in 2022 by 400,000 b/d, with the growth coming from Permian shale and the US Gulf of Mexico deepwater. Including natural gas liquids and biofuels, the US is set to add 660,000 b/d in 2022. John van Schaik, New York World Crude Oil and Other Liquids Supply ('000 b/d) 2021 2022 Chg. Crude '22 Other '22 Non-Opec-Plus 44,320 45,508 1,188 32,339 15,481 US 17,684 18,349 665 11,534 6,815 Canada 5,409 5,563 153 4,400 1,162 Brazil 3,888 4,133 245 3,281 852 Colombia 751 745 -6 745 0 Norway 2,078 2,194 116 1,881 313 UK 1,016 989 -27 889 100 Egypt 676 693 17 583 111 Qatar 2,063 2,118 55 597 1,522 China 3,928 3,968 39 3,968 0 India 707 686 -21 574 112 Indonesia 668 648 -20 604 44 Other Non-Opec-Plus 5,452 5,422 -30 3,285 4,450 Opec-Plus 49,475 51,837 2,362 43,997 7,840 Opec 31,658 33,302 1,644 28,070 5,233 Saudi Arabia 11,293 11,957 664 9,676 2,281 Iraq 3,940 4,005 65 3,941 65 Iran 3,260 3,558 298 2,804 754 UAE 3,811 4,024 212 2,963 1,061 Kuwait 2,584 2,745 160 2,575 169 Nigeria 1,665 1,777 111 1,532 245 Libya 1,273 1,428 155 1,368 60 Algeria 1,354 1,393 39 967 426 Angola 1,150 1,112 -38 1,077 34 Other Opec 1,328 1,305 -22 1,168 137 Non-Opec 17,817 18,534 717 15,927 2,607 Russia 11,164 11,838 673 10,187 1,650 Kazakhstan 1,816 1,900 84 1,617 283 Azerbaijan 783 745 -38 653 92 Mexico† 1,885 1,840 -46 1,640 200 Oman 1,007 1,021 14 833 189 Malaysia 630 639 9 468 171 Other Non-Opec 532 551 20 531 21 World Supply 93,795 97,344 3,550 76,336 23,321 Refinery gains 2,139 2,313 174 0 0 Total World 95,934 99,657 3,723 76,336 23,321 *Other liquids include natural gas liquids, biofuels, gas-to-liquids,