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Opec-Plus Sticks to Plan Amid Chaos

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AP_19340671292112-OPEC Secretary General Mohammad Barkindo

Faced with plunging oil prices and a highly uncertain situation from the new Omicron coronavirus variant, Opec-plus decided Thursday to stick with its previously agreed plan for monthly supply additions of 400,000 barrels per day. Given recent precipitous price falls, a rise in OECD stocks in October, and consumer pressure to increase supply, a difficult meeting had been anticipated. But the decision was taken quickly. As one delegate noted, Opec-plus' regular monthly meetings enable it to respond quickly if it sees any market imbalance emerging. Nevertheless, given how emphatically Omicron has driven sentiment bearish, it is noteworthy just how little account producers have given to the new Covid-19 threat. For the period under scrutiny at this week’s meeting — from now until the end of 2022's first quarter — Opec-plus has actually significantly improved its near-term demand outlook. Opec’s latest Monthly Oil Market Report — published on Nov. 11 — saw demand tumbling by almost 1.5 million b/d in Q1'22 from this quarter, but the most recent projections seen by Energy Intelligence put the drop at just 400,000 b/d, under a base-case scenario. Opec-plus' low demand, alternative scenario sees demand slide by a more substantial 1.05 million b/d. The group has been assessing the Omicron threat this week and will continue to do so. An initial presentation to Opec-plus’ Joint Technical Committee (JTC) showed OECD stocks flipping to a 118 million bbl surplus to the 2015-19 average by end-2022. But in the latest JTC version, the end-2022 stocks surplus is some 14 million bbl lower. Opec-plus is scheduled to meet again on Jan. 4, 2022.

A move to slow supply increases could have spooked oil markets into a steeper plunge by signaling that recent demand destruction fears were justified. A senior producer official noted that Opec-plus has managed to put a floor under the oil price. The group stands ready to take further action, if necessary, as hinted in its’ post-meeting communiqué, which unusually declared that the meeting “remains in session.” For now, there is too much uncertainty over demand to risk precipitous action, as reflected in the wildly differing analyst assessments of the potential Omicron demand impact. These vary from a 400,000 b/d annual drop in 2022 according to a Goldman Sachs report seen by Opec-plus to a 3 million b/d collapse in Q1'22 predicted by one Rystad Energy scenario. If new restrictions imposed by Germany on all unvaccinated citizens prove a harbinger of an intensified global response to the new threat, the market could be heading for a major inflection point. Supply also remains a concern. This month’s consumer strategic stock release announcements may have very little impact — and recent price falls suggest they may not materialize. But delivering additional volumes has been a challenge due to falling capacity among several key Opec-plus members. Under-production has been undermining the credibility of Opec-plus market management in recent months. But in the context of current market conditions, a structural inability to hit the monthly 400,000 b/d might be a boon.

Opec-plus celebrates its fifth birthday this month. The alliance has silenced initial skepticism and proved to be both durable and effective. The need for producer unity in the face of energy transition threats is another reason to think that group unity is unlikely to crumble any time soon, despite some very real internal tensions. However, exceptionally treacherous policy terrain lies ahead, and cohesion may be harder to manage during a period of prolonged price strength than during the times of market crisis that have held the group together throughout most of its turbulent existence. The fact consumers are now starting to coordinate so closely, as seen by the recent strategic stock release announcements, should come as a wake-up call for Opec-plus.  A looming leadership change at Opec’s secretariat could also prove disruptive to market management efforts. Current Opec Secretary-General Mohammed Barkindo could be replaced as early as this summer. Barkindo has, by most accounts, guided Opec-plus since its inception with some distinction. He was a key facilitator of the April 2020 historic producer 9.7 million b/d megacut. The favorite to replace him, former Kuwaiti Opec Governor Haitham al-Ghais, has backing from Gulf states, including Iraq, sources say. But African Opec states are lobbying for Barkindo, who has always championed their interests, to stay on. A debate on the subject was postponed to January, sources say.

Opec-Plus' Base-Case View of the Market
(million b/d)Q4'212021Chg. 2021/20Q1'22Q2'22Q3'22Q4'222022Chg. 2022/21
Demand99.596.45.799.199.8100.9102.5100.64.2
Supply98.4495.21.5101.1101.4102.4104.1102.27.0
Non-Opec-Plus47.2546.20.548.3347.4347.4448.7648.01.7
Opec-Plus46.0043.81.047.4948.7049.6750.0149.05.2
Opec NGLs5.25.20.15.25.35.35.35.30.1
Supply-Demand Balance-1.1-1.2--1.91.61.51.61.7--
Implied Stockbuild (million bbl)-97-442--173148139147607--
Difference to 2015-19 Avg. (million bbl)-170-170---79-47-4104104--

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