Opec-Plus: Projected Stockbuild Promises Tough Decisions Ahead

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Opec-Plus Faces Growing Tensions

• Opec-plus this week was quick to sign off on a scheduled oil production increase of 400,000 barrels per day in October. • But a projected hefty stockbuild in 2022 could jeopardize plans to phase out the remaining production cuts. • Wild cards to watch include the rapid spread of the Covid-19 Delta variant and Iran's possible return to market. This week's Opec-plus ministerial meeting may have been a smooth and -- at roughly an hour -- quick affair. With oil prices at healthy levels and the latest set of data produced by the alliance's technical committee pointing to a fall in OECD commercial stocks below their 2015-19 average until year's end, there was no need to change the July decision to increase production by a total of 2 million b/d over the last five months of 2021 (IOD Sep.1'21). Requests for the revision of production baselines, which caused some stir at the last meeting, weren't submitted this time, even though some countries had been toying with the idea (EC Jul.23'21). Still, tough decisions lie ahead for the producer alliance amid ongoing concerns over the impact of the Delta variant on global economic growth and oil demand in 2022. Add to this Opec-plus' plans to phase out all its remaining cuts by next September, along with recovering non-Opec output in 2022, and next year is something that needs watching, said one Opec-plus delegate. Further tweaks of the alliance's market management strategy can't be ruled out. Demand in Focus In a statement after the meeting, Opec-plus struck an optimistic note. "While the effects of the Covid-19 pandemic continue to cast some uncertainty, market fundamentals have strengthened and OECD stocks continue to fall as the recovery accelerates,” the producer group said. Energy Intelligence understands that Opec plans to revise upward its 2022 oil demand figure to 4.2 million b/d from its latest estimate of 3.3 million b/d, published in its monthly report in August. The move, some Opec-plus sources believe, will help the group send a more positive message to the market by making any stockbuild appear more manageable. Discussion of the new demand outlook is expected to feature at the next ministerial meeting on Oct. 4. But, said Edward Bell, senior director at Emirates NBD, “with a moderating demand picture and a positive supply response from market-oriented producers in countries like the US and Canada, the Opec-plus plan to rigidly add 400,000 b/d each month until at least September [2022] could end up tipping oil market balances substantially into surplus next year.” And with higher baseline levels for major producers also to take effect from May, the annual individual increases in volume may be enormous, he adds. To be sure, not all countries will be able to reach their full output levels due to technical challenges, which means Opec-plus won't necessarily return the entire 5.6 million b/d by September 2022 should it indeed stick with the plan. But the volume is still going to be large. “Should Opec-plus producers worry that they will be directly contributing to an oversupplied market from the start of 2022, we would expect them to adjust their targets quickly to try and keep oil markets closer to being balanced,” said Bell. Scenarios Flag Rising Stocks The two scenarios examined by Opec-plus' Joint Technical Committee this week show just how great the threat to balances is. Its base-case scenario assumes global demand growth of 6 million b/d in 2021 and 3.3 million b/d in 2022. Regarding stocks in 2021, the scenario shows OECD commercial oil stocks running 74 million barrels below their five-year average for 2015-19 at the end of the third quarter of 2021, and 56 million bbl below the five-year average at the end of the fourth quarter. For 2022, however, the same base-case scenario shows stocks building throughout the year, exceeding the 2015-19 average at the end of each quarter to finish the year 264 million bbl above the five-year average. The picture looks even more bleak under the alternative scenario. Assuming slower demand growth, OECD commercial stocks are estimated at 34 million bbl below the five-year OECD average by the end of the third quarter of 2021, but flipping to 100 million bbl above the five-year average by the end of the fourth quarter. Next year, stocks continue to rise to end the year at a massive 679 million bbl above the 2015-19 OECD average. Both scenarios account for the decisions taken by Opec-plus ministers at their July meeting and assume that Iran, Libya and Venezuela -- presently exempt from cuts -- continue to produce at estimated July 2021 levels for the rest of 2021 and during 2022. Given the uncertainty around the impact of new Covid-19 variants on public health and economic activity, the alternative, slower demand growth trajectory seems quite plausible. Iran's Uncertain Return

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