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Opec-Plus Navigates Murky Market Outlook

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Opec-plus ministers are starting to position themselves for their Dec. 4 meeting in Vienna, amid an uncertain environment of ongoing oil market volatility, global recession concerns and increased Covid-19 cases in China.

A tense geopolitical climate, with EU sanctions on Russian crude and a G7 price cap due to take effect the following day, will complicate matters further.

All this makes the outcome of the Opec-plus meeting hard to call.

At stake is whether the group's next move will involve some form of easing of the headline 2 million barrel per day cut through the end of 2023, which was announced in early October.

After last month's public spat with Saudi Arabia, US officials expect this — but for now, members remain tight-lipped about options.

Some positioning has started over members' production baselines -- which would be one way to free up more output in the market by aligning members' quotas more closely with their true production capacity.

The other main option to ease the cut would be a simple adjustment of the 2 million b/d target.

Opec-plus could also choose to maintain — or deepen — its cuts, given a negative market outlook, although this could provoke a renewed US reaction.

Energy Intelligence takes a look below at the key questions in the run-up to the meeting.

What are Opec-plus' options for the coming meeting?

Specific oil policy proposals have yet to be discussed ahead of the Dec. 4 meeting, according to delegates.

However, the recent decline in benchmark Brent crude to below $90 per barrel, mainly due to demand concerns and the slowdown in China's post-Covid reopening, is for now reinforcing the idea among members that caution remains critical.

The drop in oil prices is seen by many in Opec-plus to have confirmed the group's concerns about the market when it decided to cut output.

At the time, officials said the decision was taken to get ahead of the demand curve and head off any collapse in oil prices.

On Monday, the Wall Street Journal reported that the producer group might ease its cuts by 500,000 barrels per day, which sent Brent prices tumbling to $83/bbl.

The report was "categorically" denied by Saudi Energy Minister Prince Abdulaziz bin Salman, which in turn sent oil back above $87/bbl.

The Saudi minister also indicated that supply could be further reduced, if necessary.

"If there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene," Prince Abdulaziz said in a statement carried by the official Saudi Press Agency.

The denial was a rare move by Saudi officials, who are keen to maintain control over market messaging. Officials from the UAE, Iraq and Kuwait also denied the report, in a sign of unity among Gulf producers.

Realistically, any increase in output would have to come from Mideast Gulf producers that are able to meet their current supply quotas, such as Saudi Arabia and the United Arab Emirates (UAE).

Last week, Prince Abdulaziz also signaled that he favors a cautious approach in market supply policies.

These comments may suggest that any adjustment of the headline 2 million b/d cut might be put on hold until there is more clarity on how the market will react to an apparent weakening in demand and the new sanctions on Russian crude.

While the option of deepening the cuts further remains a possibility, delegates presently think this is unlikely.

The bottom line is that an easing of cuts is an option that delegates say might be discussed, but that any move would likely be very measured.

If agreed, it would essentially represent a signal to consumer states that Opec-plus remains committed to meeting their supply needs in the future.

What would a baseline adjustment involve?

Some positioning has also started over the thorny issue of members' production baselines.

Iraq's prime minister has called for a revision of his country's baseline, although there are questions over how much more the Opec member could boost its output given export infrastructure limitations.

The UAE is also known to be keen to use more of its expanding capacity.

The issue is that for months, many Opec-plus members, including Russia, Nigeria and Angola, have been falling short of their targets.

As a result, the group has been pumping about 3.5 million b/d less than targeted.

The volume of oil released by such a move would depend on how the issue is addressed, and whether baselines are merely tweaked or fundamentally realigned.

It would be a very sensitive matter to negotiate, as many members are keen to preserve their share of the oil market — even if only on paper.

The issue's potential to create tension within Opec-plus is a major deterrent to discussing baselines at this point, Energy Intelligence understands, making this less likely as an option.

What do current supply-demand balances look like?

Last week, Opec again lowered its demand growth estimates for 2022 and 2023, saying there are signs that the global economy has entered a period of "significant uncertainty and mounting challenges."

Opec trimmed its demand forecasts for both years by 100,000 b/d each. That followed downward revisions last month of 500,000 b/d for 2022 and 400,000 b/d for 2023.

Energy Intelligence balances point to a surplus of around 600,000 b/d in the first half of 2023.

Combined with recent price weakness, this indicates a sloppy market going into the meeting.

However, major uncertainty exists around the supply impact of the new sanctions on Russia, which — if they cause a major disruption — could significantly change the near-term outlook for balances.

How will the relationship between Opec-plus and the US affect matters?

The US responded with fury to the Opec-plus cut, focusing its anger on the group's de facto leader Saudi Arabia.

The resulting public spat has since cooled. Some US officials hope this calmer atmosphere will help the kingdom return more supply at the next meeting.

Immediately after the decision to cut, some Opec-plus officials indicated that it could be tweaked in the future, depending on market conditions.

It is unclear whether there have been any direct or indirect assurances from Opec-plus states to US officials that more supply would be added at the December meeting.

Adding to the uncertainty is the possibility of another release of US strategic oil stockpiles, beyond the 180 million barrels already announced.

That would irritate Opec-plus members and would likely influence their Dec. 4 decision — but the US may be waiting to see what Opec-plus does first.

What about Russia?

Like the last Opec-plus meeting, the coming gathering will take place in a highly charged political environment.

Many Opec-plus members hope there won't be a repeat of Washington's angry reaction to the last decision, in which some US officials accused the group of siding with Russia in its war in Ukraine.

At the same time, keeping Russia on board as a member of the broad Opec-plus group is seen as a priority.

Moscow is keen to see oil prices stay high to counter the impact of sanctions. The US, as part of a broader G7 effort, is trying to do the opposite — limit Russia's revenues — through the price cap.

In the face of this, Opec-plus delegates recognize that striking a balance might be tricky, and that if a further deepening of the cuts is deemed necessary, this would most likely set off another round of criticism.

From a practical standpoint, there are questions over how the group would replace any loss of supply if Russian exports are impacted by the sanctions — either because Moscow cannot find enough alternative buyers in time, or because it cuts supply.

Deputy Prime Minister Alexander Novak said this week that Moscow would not ship oil to countries that implement the price cap and that imposition of a cap would "inevitably" lead to "lower supply."

Topics:
Opec/Opec-Plus, Opec-Plus Supply , Oil Inventories
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