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Opec-Plus Sticks With Gradual Supply Increases

Copyright © 2021 Energy Intelligence Group
Opec-Plus Faces Growing Tensions

Opec-plus ministers rubber-stamped their previous decision to keep raising oil production in monthly increments of 400,000 barrels per day, quickly dismissing an alternative proposal at their meeting on Monday.

There had been talk of raising production by 800,000 b/d in November, followed by a pause in the monthly increases in December.

But the alliance swiftly opted to stick with the smaller November increase, amid fears of oil stocks piling up again next year. The ministers' meeting lasted just 25 minutes.

Brent crude oil futures hit a three-year high of almost $82 per barrel shortly afterward, eventually settling with a gain of around $2 for the day at $81.26.

"The meeting was calm and very fast. Everyone was in agreement," one delegate told Energy Intelligence.

After the devastation caused by the collapse in global oil demand last year, few within Opec-plus are complaining publicly about high prices.

Even Russia's Alexander Novak called Monday's decision a "balancing moment that would allow us to continue to normalize the market condition."

Moscow generally tends to regard prices of $80/bbl or higher as unsustainable and risky.

But fears are growing in major consuming countries about tightness in the oil market, especially given the receding prospect of Iran returning to the market this year.

High prices for natural gas are an additional source of concern. Some estimates suggest they have boosted demand for oil for power generation by 500,000 b/d.

The Biden administration has been in direct contact with Mideast Gulf producers about prices, but is not seeking to put pressure on them, according to one source.

Rosy Outlook, But Dangers Lurk

Opec-plus had added a further sprinkling of optimism to its already rosy oil market forecast ahead of Monday's meeting, as economic activity around the world continues to gradually return to pre-Covid-19 levels.

The group recently increased its forecast for growth in global oil demand next year by 900,000 b/d to 4.2 million b/d, while also lowering its estimate of non-Opec output for 2021 to reflect recent production outages in the US and Mexico.

Meanwhile, a delegate said Mexico might revert to active membership of the Opec-plus alliance after only briefly participating in the joint production cuts last year.

Under a base-case scenario outlined last week, Opec-plus estimates that it has until October 2022 before OECD oil inventory levels exceed their 2015-19 average.

However, under an alternative low demand-high supply scenario, OECD stocks would surpass the average as early as February, if Opec-plus sticks with its current pace of production increases.

Speaking at the Energy Intelligence Forum on Monday, the heads of major oil-trading companies appeared fairly relaxed about the short-term oil market outlook.

However, Vitol CEO Russell Hardy noted that high prices posed downside demand risks both for oil and natural gas.

"If confidence gets rocked in a significant way you can harm demand, and obviously you can harm demand for the long term as well," he said.

"So trying to get the balance right on the oil price is important, and I think Opec are paying attention to that. But clearly we haven't found where they think is the right ceiling for the oil price," Hardy added.

Gunvor CEO Torbjorn Tornqvist said Opec-plus spare production capacity was "not insignificant," estimating it at around 4 million b/d, excluding Iran.

But Tornqvist said he expected a tighter market in 2022, forecasting an oil price of $85/bbl by this time next year, even if US sanctions on Iran's oil exports are lifted.

Transition Tensions

Monday's Opec-plus meeting was the last before critical UN climate talks in Glasgow, where world leaders will discuss efforts to curb greenhouse gas emissions to avert a catastrophic rise in temperatures.

The International Energy Agency says the energy sector is responsible for around 75% of those emissions, with the agency's chief Fatih Birol telling the Forum that "no country will be immune" from the clean energy revolution.

Many Opec-plus producers argue, however, that the current upheaval in the gas market is evidence of the kind of disruption and volatility that will be caused by a lack of investment in fossil fuels as a result of climate change scare-mongering.

In remarks to the Forum, some oil industry leaders pushed back against Western-led efforts to fast-track the clean energy transition.

Saudi Aramco CEO Amin Nasser warned that a lack of investment in the oil and gas sector will inevitably cause a supply shortfall. He also argued that clean energy was a Western luxury that most of the world cannot afford yet.

"The assumption is that Europe may be able to afford the expensive solutions being proposed. … Unfortunately, most of the developing world won't be able to come up with additional costs for this energy transition," Nasser said.

Opec-Plus November Production Ceilings
OpecBase ProductionNovember Ceiling
Saudi Arabia11,0009,913
Iraq4,6534,193
UAE3,1682,855
Kuwait2,8092,532
Nigeria1,8291,649
Angola1,5281,377
Algeria1,057952
Congo (Br.)325293
Gabon187168
Eq. Guinea127115
Opec 1026,68324,047
Non-OpecBase ProductionNovember Ceiling
Russia11,0009,913
Mexico1,7531,753
Kazakhstan1,7091,540
Oman883796
Azerbaijan718647
Malaysia595537
Bahrain205185
South Sudan130117
Brunei10292
Sudan7568
Non-Opec 1017,17015,647
Combined 2043,85339,694

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