OPEC+ Faces Growing Pressure to Change Course as Ministers Meet
(Bloomberg) - When OPEC and its allies met last month, Saudi Arabia's energy minister dared oil speculators to test his determination to stabilize global markets.
Now that a resurgent pandemic threatens demand again, the moment of reckoning is nearing.
The coalition of crude oil producers will meet on Monday to assess the market situation. No delivery decisions are expected by December 1, but leading members Saudi Arabia and Russia are already strengthening their diplomacy. President Vladimir Putin and Saudi Crown Prince Mohammed Bin Salman spoke on the phone twice in a week - the first since the depths of the oil crisis in April when they worked out a deal to cut supplies and end the price war.
With oil stuck at around $ 40 and more supplies coming online from Libya, the cartel is now under pressure to revise its plan to ease these production cuts. It has already loosened them by about 2 million barrels a day and is set to add another 1.9 million in January.
While members are publicly sticking to this plan for the time being, OPEC General Secretary Mohammad Barkindo admitted Thursday that demand is "anemic" and the cartel will take steps to prevent the market from "relapsing". The company's own internal reports indicate the risk of a new surplus. Privately, if a formal decision is made within six weeks, delegates admit that they are willing to delay the increase.
Read: OPEC's deteriorating view of the oil market
Influential voices in the market are already telling OPEC + to be careful with the planned increase.
Trading houses like the Mercuria Energy Group, banks like JPMorgan Chase & Co. and institutions like the International Energy Agency advise that the markets remain too fragile to be able to easily accommodate the additional barrels.
"Adding oil to the market at this point is not an advisable move," said Natasha Kaneva, an analyst at JPMorgan in New York.
These views can be taken into account during the online meeting of the Joint Ministerial Monitoring Committee on Monday, chaired by Saudi Arabia's Energy Minister Prince Abdulaziz bin Salman and his Russian counterpart Alexander Novak. The panel will not decide on next year's delivery, which will be determined at the major ministerial meetings from November 30th to December 30th. 1.
This decision will have profound implications not only for the organization of the oil-exporting countries - many of their member states require prices well above current levels to cover government spending - but also for the entire industry, from shale drills to majors like Exxon Mobil Corp.
A glimmer of hope
Lately there have been glimmers of hope in oil prices that producers must be careful not to wipe out.
Global oil demand has recovered to 94% of pre-pandemic levels and depleted the world's inflated inventories, the International Energy Agency estimates. Shoppers in China, the world's second largest consumer, will increase their purchases after slowing down over the summer. Indian refineries start ahead of the country's two main festivals.
Greater consumption by the two Asian giants will play a big role in the final decision in December. Ministers will also consider data from other parts of the world as the virus spreads and the outcome of the US presidential election in early November.
However, a full return to previous demand levels will take a few years, especially for jet fuel, as trading houses like Vitol Group and Trafigura Group predict. OPEC + must continue to deplete global inventories to avoid further overloading and falling prices.
If the group "adds production as planned in January, we will run out of crude oil supplies," said Torbjorn Tornqvist, CEO of trading house Gunvor Group Ltd., in an interview.
Another reason to postpone the surge recently emerged when Libya, exempted from efforts to restrict supply, resumed production.
The OPEC nation quintupled production in a matter of weeks after a military commander allowed ports to reopen. After restarting the largest oil field, it is currently producing 500,000 barrels a day, and the IEA estimates that another 200,000 barrels a day could be added by the end of the year.
An internal report presented to an OPEC + technical committee last week showed the group is aware of the dangers. While the central scenario predicted that global oil supplies will decline by 1.9 million barrels per day over the next year, it warned that if Covid-19 hits demand more than expected and Libya one, inventories could easily pile up instead strong recovery recorded.
Delaying the planned production rejuvenation, however, would have its own complications as countries would have to forego the revenue that additional production could bring.
Another problem will be to clear the backlog of compensation cuts that nations like Iraq and Nigeria owe in return for disregarding quotas in the early months of the deal. Saudi Arabia and Russia have urged their colleagues to meet their production commitments as oil prices come under renewed pressure.
"At the moment, when demand is fragile and Covid-19 cases are picking up again, all manufacturers have an incentive to work together," said Helima Croft, head of commodities strategy at RBC Capital Markets LLC.
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