The OPEC+ alliance of Saudi Arabia and Russia had a rocky week in oil production, with the pan-alliance meeting scheduled for Tuesday being postponed to Thursday, December 3. The video conference finally began at 10:00 a.m. Eastern, and a press conference was held three and a half hours later.
Kazakhstan’s Ministry of Energy released a statement confirming that OPEC+ will increase oil production by 500,000 barrels per day in January 2021, with producers allocated a proportional share of the increased quota, followed by monthly ministerial meetings to discuss the follow-up oil production agreement.
In the meantime, Saudi Arabia will continue to serve as co-chair of the OPEC+ Joint Production Cut Monitoring Committee (JMMC). Rumors of Saudi Arabia’s withdrawal from this position followed reports that the Saudi oil minister was not chairing the OPEC+ meeting, but rather a Russian government official was chairing it alone.
According to an OPEC+ representative, OPEC+ will meet every month from January to March of next year, and the scale of further production increases must not exceed 500,000 barrels per day for each month after January. According to two other representatives, countries with poor implementation of previous compliance agreements will be required to make additional production cuts in the form of compensation, which will be implemented until March of next year.
The coalition’s formal decision differs from many market reports in that the increase in production has been confirmed to begin in January of next year. Since yesterday, both Bloomberg and Reuters have cited sources saying that the current production cut agreement will be extended until January of next year, with a gradual increase of 500,000 bpd starting in February, and that OPEC+ intends to increase production by 500,000 bpd per month from February to May of next year.
Prior to this week’s OPEC+ meeting, financial market analysts generally expected that OPEC+ would extend the current 7.7 million bpd production cut until at least March 2021, equivalent to 8% of global oil supply. Otherwise, as originally planned, OPEC+ will increase production by 2 million barrels per day from January 2021, narrowing the agreement to 5.7 million barrels per day.
Before the release of the final OPEC+ policy, international oil prices jumped in the short term as the news of “500,000 bpd production increase from February” seemed solid. An hour before the U.S. stock market, U.S. oil WTI was down 0.5% at $45.06/bbl, while Brent was down 0.4% at $48.04/bbl.
After the final decision was released, oil prices stopped falling and turned up in Thursday’s midday U.S. trading. International Brent crude oil rose 1% on the day to $48.75/bbl, while U.S. oil WTI also rose 1% on the day to $45.74/bbl.
Analysts pointed out that the OPEC+ production cut scale retreat is more moderate than expected, giving the fragile market more time to absorb excess inventories; as 500,000 barrels per day of increased production is a quarter of the original plan of 2 million barrels per day, the short-term push up the price of oil.
OPEC economists believe that if production increases by 2 million barrels per day immediately according to the original plan, the oil market will fall back into a pattern of oversupply, which may undermine the recent gains in oil prices, Brent crude oil has risen 27% since November, but is still down 25% this year. The new revised agreement will help the oil market maintain its supply deficit in the first quarter of next year, driving down excess inventories even further.
Bjornar Tonhaugen, head of crude oil markets at Rystad Energy, noted that oil prices gave back some of their gains at the beginning of the week, mainly because OPEC+ production talks did not go as smoothly as expected. Ole Hansen, head of commodity strategy at Saxo Bank in Denmark, also said that the surprise this time was not the conflict between Russia and Saudi Arabia, but the intensification of internal divisions between Saudi Arabia and its traditional ally, the United Arab Emirates.
Saudi Arabia has reportedly been advocating an extension of the current deal to the first quarter of next year, but non-OPEC countries such as Russia and Kazakhstan have called for a gradual increase in production while oil prices recover, while the UAE, OPEC’s third-largest producer, has demanded compensatory production cuts from countries with unfavorable previous compliance records (e.g., Russia, Iraq and Nigeria).
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