Opec-Plus Faces New Challenge in Volatility

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Recent oil market volatility has cast some uncertainty over what Opec-plus will do with its supply policy at its next meeting on Sep. 1. Benchmark Brent has rallied back above $71 per barrel after dropping under $66/bbl last week on demand concerns generated by fresh outbreaks of the Covid-19 Delta variant (PIW Jul.23'21). Besides Delta's impact on the demand recovery, Opec-plus has other matters to consider. Iran's return to the market no longer looks imminent since nuclear talks with the US have stalled, while the Biden administration has called on the producer alliance to increase production beyond its current plan of 400,000 barrel per day increments per month. Although the topic of prices has been taboo for public discussion, Energy Intelligence understands that major producers favor Brent staying in the mid- to high-$60s. “Last week prices really dropped badly and now we are seeing a recovery, so this level of volatility is making it harder to say what the ministers will decide,” said an Opec-plus delegate. Most Opec-plus officials say that no informal talks have taken place yet between members, although such discussions are likely to happen a day or two before the meeting. The group has been holding monthly meetings to allow flexibility to adjust its supply policies in the face of the ongoing pandemic. Aside from the near-term impacts of Delta, producers are also concerned about an expected significant dip in oil demand in the first half of 2022, and sources say they are likely to pause monthly supply increases after December. It is not just a demand challenge that producers face. A major upward revision by Opec to its view on non-Opec supply in 2022 has fundamentally shifted balances, with demand for Opec crude now some 1.5 million b/d lower in H1 2022 compared to last month's projection. Now, Opec sees global appetite for its crude crashing by some 3.77 million b/d from Q4 2021 to Q1 2022, raising questions about whether renewed output restraint could be necessary. During the course of the pandemic, Opec leader Saudi Arabia has demonstrated support for a more cautious, measured approach to avoid prices spiraling out of control (PIW Jul.16'21). Any decision to change plans now would not likely take effect until October, as producers have already allocated their export volumes for September. The recent slowdown in Chinese demand is a concern since China has been a lifeline for top Opec-plus exporters for years. China is the largest single market by far for both Opec-plus leaders Saudi Arabia and Russia. Saudi Arabia has posted increased sales to China annually since 2014; Russia has done so since 2010; and Iraq since 2007. However, a combination of new Covid-19 restrictions, controls on independent refiners, and aversion to higher prices has seen Chinese crude buying slump in recent months (PIW Aug.13'21). China's crude imports for January-July were down 622,000 b/d year over year, while May-July has seen an alarming 2.4 million b/d year-over-year plunge. The Biden administration's plea to increase production to reduce prices did not fall on deaf ears, but Opec-plus did not publicly respond (PIW Aug.13'21). So far, consensus appears to center around maintaining a policy that keeps the group's interest first but also helps balance the market. Some observers see Biden’s plea as a sign that a nuclear deal with Iran is not within reach, meaning that Tehran’s barrels will not be freed from sanctions. Iran’s potential return to the market is a concern for its regional foe Saudi Arabia, but also presents issues for Opec-plus, which would need to make room for the 1.5 million b/d that Iran could add by end-2022 if sanctions are lifted soon. Further revisions of production baselines for member states could also emerge as a thorny issue. Delegates told Energy Intelligence that Nigeria and Algeria plan to request upward revisions to their baselines (related). Group leader Saudi Arabia has tried to avoid tackling the difficult issue of revisions since last year. But with the United Arab Emirates, Saudi Arabia, Russia, Iraq and Kuwait getting higher baselines after tough negotiations initiated by the UAE in July, it may be a difficult topic to avoid. Higher baselines will lower these producers' share of remaining Opec-plus production cuts during the last eight months of 2022 (PIW Jul.9'21).

Oil Demand, Oil Supply, Opec-Plus Supply , Opec/Opec-Plus, Crude Oil
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