As one of the most stormy years in oil’s history ends, an important task now awaits OPEC+ (Organization of the Petroleum Exporting Countries).
The alliance of oil producers led by Saudi Arabia and Russia must decide whether it can continue to restore crude supplies without affecting the price recovery they spent most of 2020 working to achieve.
Russia believes that the group, which slashed output during the pandemic, can revive another 500,000 barrels a day of idle capacity in February, on top of an increase scheduled for this month. Saudi Arabia, which has favored greater caution, is keeping its own views under wraps.
Whatever they ultimately decide, the Organization of Petroleum Exporting Countries and its partners are leaving nothing to chance. With its January 4 gathering, the coalition is switching to meeting every month, rather than just a few times a year, in order to fine-tune production levels more precisely.
Crash of crude price
Last year’s challenges for OPEC+ began in February, when oil demand in China collapsed 20 percent as the world’s biggest importer locked down to beat the emerging coronavirus.
Saudi and Russia then clashed over how to respond to the demand shock, a dispute that shattered the 23-nation alliance and ushered in a vicious price war. By April, the world was so awash in crude that US futures traded below zero for the first time in history. Relations were only mended after the intervention of US President Donald Trump who brokered a peace deal that resulted in OPEC’s biggest-ever output cuts.
Saudi Vs. UAE
Phasing out those curbs is provoking new controversies. Last month, OPEC+ talks ran into a five-day stalemate as Saudi Arabia and the United Arab Emirates, allies in both political and energy spheres for years, disagreed over how quickly to revive the production.
While the kingdom wanted to delay any increases for three months, its neighbor, eager to monetize investments in capacity, and promote a new regional oil benchmark pushed for a speedier timetable. Though a compromise was reached, the brief rupture in their longstanding partnership, which at one point even saw Abu Dhabi hint at eventually leaving OPEC, has left an ominous shadow.
The pace of restoring output will occupy the producers on January 4th. Currently idling 7.2 million barrels a day, or about 7 percent of world supplies, they have resolved to return a further 1.5 million barrels a day in carefully calibrated installments.
Russian Deputy Prime Minister Alexander Novak has signaled his readiness to proceed, saying last month that prices are in an optimal range of $45 to $55 a barrel. If OPEC+ refrains from bolstering exports, its competitors will simply fill the gap, he said.
Novak’s Saudi counterpart, Energy Minister Prince Abdulaziz bin Salman, hasn’t publicly expressed a preference beyond his intention to keep speculators “on their toes.” As of now there are high chances of going ahead with the production increase.
Oil prices have stabilized above $50 barrel in London despite OPEC’s pledge of extra supply, bolstered by vaccine developments and robust fuel use in Asia. Supply and demand should remain broadly balanced in the first half of the year, according to the Paris-based International Energy Agency (IEA).
It’s a choice that might also come as a relief to OPEC+ members like Iraq. Baghdad is engulfed in a mounting economic crisis that is only exacerbated by limits on oil sales, and is struggling to get through a backlog of overdue output cuts from 2020.
Uncertainty in demand
But there’s also an argument for holding back the extra barrels. Oil refiners haven’t yet had a chance to absorb this month’s supply hike, and a more infectious virus strain is clouding the outlook for demand.
While the IEA anticipates no fresh surplus, it warned that the existing inventory overhang will linger to the end of the year if OPEC+ increases output. Despite the market’s rebound, crude prices remain far below the levels most OPEC members need to cover government spending.
Finally, OPEC+ must navigate the impact of incoming US President Joe Biden, who has signaled readiness to revive a nuclear pact with Iran that could release more than 1 million barrels a day of oil exports currently under US sanctions.