Opec-Plus Keeps Supply Policy on Autopilot

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Opec-plus has announced another increase of 400,000 barrels per day in its combined oil output for February, reflecting its confidence that the market can comfortably absorb the steady growth in its output.

The outcome of the alliance's latest ministerial meeting was in line with market expectations and was consistent with the view that the current wave of Covid-19 infections will not have a major impact on global oil demand.

That view has also supported the recent rise in the price of Brent crude futures, which topped $80 per barrel again during Tuesday's trading session.

February will mark the seventh consecutive month in which the alliance targets an increase of 400,000 b/d in its combined output to reverse the big production cuts it made in 2020 when the Covid-19 pandemic slashed global oil demand.

The combined Opec-plus production ceiling is set to rise to 40.894 million b/d in February, while the ceilings for the alliance's two largest producers, Saudi Arabia and Russia, will rise to 10.227 million b/d each.

Struggling to Keep Up

Some members have struggled in recent months to keep up with the steady production increases.

But at their latest virtual meeting on Tuesday, Opec-plus ministers also reviewed numbers which showed that global oil inventories will rise again this year after falling for most of last year.

The ministers reviewed three scenarios for the global oil market: a base case, a low-demand scenario and a newly added high-demand scenario.

Under all three scenarios, OECD commercial oil stocks will gradually increase throughout 2022, and under the first two scenarios stocks will flip to a surplus versus their pre-pandemic 2015-19 average during the final quarter of the year (see table).

During the start of the Opec-plus meeting, Saudi Arabia’s energy minister Prince Abdulaziz Bin Salman announced the closure of the December meeting that had been left “open in session” for 33 days.

Delegates said Tuesday's meeting was a routine affair, lasting just over half an hour. There was no press conference and the next meeting was scheduled for Feb. 2.

Kazakhstan in the Sin Bin

The meeting did include a discussion of overproduction by some members of the alliance — an issue that was more prominent during the early phase of the current Opec-plus supply management pact, which took effect in May 2020.

Delegates said Prince Abdulaziz called in particular on Kazakhstan, to improve its compliance. According to the figures provided by the Opec secretariat, Kazakhstan’s quota compliance was at 34% in November, making it the worst offender of the group.

Data reviewed by the ministers also showed Gabon, South Sudan, Iraq and Russia overproducing.

The deadline for members to erase their cumulative overproduction has been extended until June 2022.

Meanwhile, several countries — most notably Nigeria, Angola and Malaysia — have been struggling in recent months to produce as much oil as they are allowed to under the Opec-plus agreement.

Underproduction is a less sensitive issue within the alliance. Members view not meeting a quota as a sovereign choice by that country. But overproduction is frowned upon and typically leads to exhortations from the other members to get back on track by reining in output.

In November, Opec and participating non-OPEC countries achieved an overall conformity level of 122% and 107%, respectively, according to secretariat figures. The total compliance of the group was 117%.

Concerns About Spare Capacity

Outside of the alliance, underproduction is a greater cause of concern, with countries such as the US and India accusing Opec-plus of driving up oil prices by withholding supply from the market.

Traders say there is growing concern about the alliance's dwindling spare production capacity, which could contribute to a further run-up in prices further down the road.

Sources familiar with the matter said US officials did not press Mideast Gulf producing states for an additional increase in production ahead of this latest Opec-plus meeting.

The US, meanwhile, is moving forward with its own plans to release up to 50 million barrels of oil from its Strategic Petroleum Reserve to try to put some downward pressure on oil prices and domestic gasoline prices.

However, the actual uptake may fall short of the amount of oil offered and deliveries would be spread out over the following few months, muting the impact on the market.

Opec Projections of OECD Commercial Stocks
Difference vs. 2015-19 Avg. (million bbl)2021Q1'22Q2'22Q3'22Q4'22
Base-Case Scenario-212-143-102-7724
Low-Demand Scenario-204-99-49-2090
High-Demand Scenario-214-157-124-107-13

Opec-Plus Supply , Crude Oil, Oil Inventories, Oil Prices
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