Opec-Plus: Reasons to Be Cheerful

• Strong demand and buoyant prices are prompting key Opec-plus producers, led by Russia, to start discussions over a potential further opening of the supply taps when they meet next week. • The danger of an imminent US-Iran nuclear deal sparking a fast-track return of Iranian crude, which could derail Opec- plus' carefully crafted market management, remains a very real prospect. • Yet, the signs are that producers see this as less of a threat than just a few weeks ago. Regular monthly meetings mean Opec-plus would be able to respond to any supply surge in a timely manner. Demand is the main driver behind Opec-plus' optimism. The producer group has been predicting a strong bounce back all year, but at each monthly meeting it has repeatedly had to delay supply adjustments as further evidence emerged of Covid-19's disruptive resilience. There had been a mirage-like quality to Opec-plus' encouraging demand projections -- vanishing the nearer you approached. Until now. At a technical meeting this week, the producer group pegged June demand at 96.4 million barrels per day, a full 800,000 b/d higher than its estimate for June demand just a few weeks ago. Such a radical upward revision would likely only be triggered by tangible real-world demand signals from the marketing departments of Opec-plus' national oil companies. It might be fleeting, but Opec-plus firmly believes the recovery has finally arrived. Prices support this bullishness, with basket prices of over $72 per barrel, their highest since April 2019. Bullish Demand Forecasts Back in January, Opec-plus' base-case scenario saw 2021 demand growth of 5.6 million b/d, with around 1.4 million b/d of this happening from July to December. By earlier this month, demand growth for the year had been revised up to 6 million b/d, but delays to the recovery meant that demand growth in the second half had swollen to 3.2 million b/d. It is now back to 2.9 million b/d. A low-demand scenario was also presented at this week's technical meeting, but even this sees overall 2021 demand growth of 5 million b/d, with July-December demand growing by 1.4 million b/d, theoretically allowing for some relaxation later in the year, provided Iranian oil supply doesn't come back too strongly. Opec-plus goes into this meeting with momentum on its side. It can justifiably claim to have successfully engineered the biggest ever supply action to counter last year's market rout -- history's most severe demand collapse. There have been some tough meetings (EC Dec.4'20). But the group has emerged from the ordeal of the coronavirus pandemic a more effective, cohesive organization. The early June meeting was particularly harmonious (EC Jun.4'21). Current discussions are still preliminary, but sources say that while there is some support for a 500,000 b/d increase in quota targets, Russia is urging more aggressive action to tame prices. Reasons to Be Fearful Producers appear to be approaching the Iran challenge with an attitude of: "No point sweating about what I cannot change." Opec's recent demand upgrades would appear to make the Iran threat manageable. But there is no doubt that Iran's return to the market has the potential to significantly disrupt supply-demand balances. Just as importantly, it will test Opec-plus' cohesion and by extension its market authority. Energy Intelligence's base case sees Iran's output rising from current levels of 2.6 million b/d to 3.25 million b/d by year's end, hitting 3.8 million b/d by the fourth quarter of 2022. A rapid-rise scenario sees output at 3.7 million b/d by year's end. But output is only part of the equation. Some 60 million barrels of floating storage means that Iran can make an immediate market impact on sanctions relaxation. Understandably, recapturing market share will be a priority for Tehran and it is easy to see how price competition could get bloody. It was "necessary to understand the schedule of [Iran's] return and maximum volumes," said Alexander Novak, Russia's deputy prime minister. Opec-plus' regular monthly meetings will be necessary to deliver a timely response and provide follow-up action. But compounding the market challenges facing Opec-plus is the fact that Iran's veteran Oil Minister Bijan Zanganeh is retiring. Rarely in Opec's history will so much be riding on the abilities of Iran's oil minister. The highly regarded Zanganeh would be a hard act to follow at the best of times. In these times, his close working relations with his Gulf counterparts and deft appreciation of the art of the possible could be the difference between success and failure. His likely successor will probably not be a noted oil diplomat. Rostam Ghasemi, a commander in the Revolutionary Guard who served as oil minister under former President Mahmoud Ahmadinejad and was blacklisted by the US Treasury in 2019, is the current front-runner. Reasons to Be Tearful The price trajectory points to market prospects being all rosy. But Iran and the emergence of several new strains of Covid-19 aside, there are several signs that market weakness looms, notably in China. China has been the main driver of demand throughout the pandemic, with Russia and large Mideast Gulf producers all increasing their China sales volumes, despite lower exports overall, in 2020 (EC Sep.18'20). But Chinese import volumes decreased in both April and May. Russia has been the main victim of the reduction, with January-May imports now running 71,000 b/d lower than the 2020 average. If that trend were to continue to year's end, it would mark a first annual fall in Russian crude flows to China in a decade. And ominously, this week, Beijing slashed import quotas for its private refineries, signaling potentially lower appetite in the coming months. Non-Opec supply is another threat. Opec's scenarios showed modest differences of just 100,000 b/d for its non-Opec supply projections. But price recoveries can be fickle friends and if prices go higher they could trigger a spurt in rival crude supply, even if sanctions remain on the Islamic republic. In its latest monthly oil market report, Opec upgraded its projection for 2021 non-Opec supply growth. Rafiq Latta, Nicosia