Opec Rebuffs US, Keeps Focus on Balances

Opec-plus has again disregarded US pleas to add more oil to the market to cool prices, agreeing on Thursday to stay the course with its supply policy. The group's commitment to its previously agreed plan for monthly supply increases of 400,000 barrels per day is rooted in its belief that the market, while tight, does not need more oil despite Brent's surge above $80 per barrel. Indeed, Energy Intelligence balances show that market tightness is set to loosen in the first half of 2022, and if Opec-plus were to open the taps further now, it could start eroding the position of strength it built over the past year while the world recovered from the pandemic. Energy Intelligence understands that all Opec-plus members were aligned on the agreement ahead of the meeting and none proposed altering the current pact. US officials were in touch with ministers from several Opec-plus members, delegates said, pressing them to add 600,000 b/d or 800,000 b/d to supply in December. But such proposals were never discussed at the very “smooth,” brief meeting on Thursday. Also not discussed was the possibility of making up for some members' inability to produce at their rising quotas. "Out of sheer respect of the distribution that we have agreed to, we have to keep to our allotments,” Saudi Energy Minister Prince Abdulaziz bin Salman said.

US officials have said they would explore a full range of tools to help curb prices if Opec-plus decided against adding more supply. A US industry source told Energy Intelligence that one option would be the release of crude from the country’s Strategic Petroleum Reserves (SPR), but some Opec-plus delegates warned this could have the opposite effect and send a bullish signal to the market, as more inventories would be drained. Prince Abdulaziz said the US had not communicated the SPR option to him, adding that consuming nations have the right to do what is in their best interests.

The United Arab Emirates' Energy Minister Suhail al-Mazrouei said rebalancing the market is expected to happen in the first half of 2022. Energy Intelligence balances signal that Opec-plus can add far less to supply next year than the now planned 400,000 b/d per month. To keep inventory growth under control, Opec-plus could only add 1 million b/d in the first half of 2022, rather than the 2.4 million b/d the group now envisions. Even then, balances show inventories would still add 500,000 b/d to storage tanks in the first half, which helps explain Opec-plus' caution now. These would be the first storage additions after 1½ years of almost consistent stockdraws from bulging tanks built during the pandemic’s demand collapse. By contrast, the second half of 2022 would again show major inventory draws and further tighten the market compared to 2021 — but only if Opec-plus repeats the same script as in the first half. If history is a guide, the key decision-makers in the group would opt for lower volumes and higher prices to keep their revenues high, rather than open the taps and lower the price. The market is already trading January with Brent at $81/bbl, while the forward curve sees June 2022 at $77 and December 2022 at $73.

The demand outlook remains uncertain, too, with the possibility of more Covid-19 outbreaks a threat. At the same time, considerably higher oil consumption is possible if a cold winter prompts more heating oil use and robust fuel switching due to the ongoing natural gas crisis. With these volatile prospects, Opec-plus will continue its monthly meetings and adjust its output policy — also with an eye on key macro factors like inflation and economic growth. Consumers are expected to demand an additional 3.2 million b/d in 2022, after pushing demand up 5.7 million b/d in 2021. This would essentially bring global demand to the 2019 level at 100.7 million b/d. But producers outside Opec-plus are forecast to grow total liquids production by at least 1.6 million b/d, gobbling up much of the demand growth. US shale could surprise by adding more than the expected 650,000 b/d next year, while a nuclear deal with Iran could quickly add 1 million b/d to supply.