John Hall: OPEC Agrees to Increase Output Gradually During 2021
In spite of the pandemic, OPEC would still like to celebrate its sixtieth anniversary, and like all long-term relationships, attitudes change and for OPEC, so too do partners. There is always talk of discord in the relationship and that it is on the verge of collapse, but reality always kicks in as the members realise that without the support of each other, and particularly the main players, their voices would never be heard, individual policies would falter, and they would lose any sense of direction. As one of the smaller members said to me some time ago, we each have one vote, yet those with a bigger output seem to have a bigger vote! Not all are equal.
The partnership of Saudi Arabia, the recognised leader of the group, with Russia, one of the largest non-OPEC producers in the world, has brought together over twenty oil-producing nations with the objective of bringing together the needs of each and balancing the output of oil to supposedly the benefit of both suppliers and consumers. Invariably, this does not work, and one is usually suffering to the benefit of the other. Without the partnership of these two main players there would be little control in the market.
As in all meetings, decision making is not easy, and for this one the dilemma was whether to retain the output cut currently at 7.7mbpd or reduce it by 1.9mbpd from January 2021 or do it gradually by 0.5mbpd each month. They have, however, now agreed that they will put 0.5mbpd back into the market from January but, at the same time, will meet each month to confirm the precise amount up to 0.5mbpd.
There is concern that there is a stock overhang building up and that several members are overproducing anyway while Libya, which has been absent for some years due to civil war, has bounced back and for now is looking to make up lost business. Iraq and Russia are also understood to have overproduced while UAE, usually a staunch supported of Saudi and its directives, has invested heavily and brought in outside investment to develop its oil infrastructure further and is, therefore, keen to increase output to 5mbpd by 2030. It also wants those members who have overproduced to cut further to compensate for their over-production.
A few years ago, I remember listening to Rex Tillerson as head of Exxon. At the time, the market was depressed and the industry was bleating that with low oil prices investment would fail. Tillerson’s view was that you look ahead, long-term, and not base strategy on the price day by day, and UAE appears to be following this logic.
The pandemic has hit demand across the world, and as it recovers there is much talk of being carbon neutral by a certain date, somewhere around 2050. To get there, we shall need to see a dramatic reduction in the use of fossil fuels yet, wherever one looks, oil and gas will still appear to be the main energy sources in use at the time. OPEC is concerned, as too are all oil companies, and while investors are supposedly moving out of the sector, others are maintaining their positions as a level of reality remains with the recognition that the sector is a long way off being dead.
Much of the conservation talk is coming form the OECD countries with the exception in recent years of the USA. However, the change in presidency from Trump to Biden will give a serious boost to such cleaner energy policies as President-elect Biden has stated his intention to bring the US back to the Paris Agreement. At the same time, he will perhaps hope to find a resolution to the Iran crisis and, if possible, resurrect the nuclear agreement with Iran and allies. This will be a difficult and long-term task primarily because the infrastructure within Iran has changed from being somewhat moderate to now conservative, hard line and anti-American. Of course, should agreement be reached and sanctions lifted, Iran will be free to increase output again, also adding to the frustration of OPEC. Coincidentally, as I was writing this report, news came through that Iran will not accept any preconditions proposed beforehand by the Biden administration.
There is hope in the US in particular that the recovery package being proposed by a bipartisan group of lawmakers will inject enthusiasm and demand in to the market and similarly, around the world where other countries are formulating such plans. Nevertheless, the pandemic needs to be brought under control for the impact to be felt. Several vaccines are now close to fruition and there is hope that once mass vaccination has taken place, markets will recover. Yet, what is also being realised is that the “anti-vaxxers” probably account for as much as forty percent of the population and therefore overall vaccination programmes will have limited impacts.
In spite of any confidence OPEC may see in the market ahead, it has revised its forecasts downwards and now expects oil demand, which has fallen from 99.7mbpd in 2019 to 90.7mbpd in 2020, to rise modestly from now until 2040 to 109.4mbpd and from there, to plateau and fall back to 109.1 in 2045. Less than they had forecast earlier but by no means recognising the demise of oil in the lifetime of many of us today. In the meantime, the IEA expects oil demand for 2020 to fall to 91.3mbpd, slightly higher than OPEC with demand rising by just over 1mbpd to 2030 against the 2019 level, bringing the two close to alignment for 2030.
Some level of recovery will prevail but, for now, OPEC needs to be careful not to bring about another oversupply situation. Stocks are still high and demand remains depressed while, in the background, the US rig count is picking up again and so too will output. It knows that as the price moves over the $50 mark, shale follows on and that they are keen to avoid. Currently, Brent is trading at around $48 and WTI around $45. Perhaps day-to-day events may push it over $50, but being realistic, we shall probably not know the extent of the recovery until midway through 2021 and not see any significant change in the oil price until then. For safety and to maintain a level of harmony across the OPEC and OPEC+ spectrum, my guess is that what we have seen today is sufficient to pacify all members for a while longer.