Ahead of OPEC+’s meeting this Tuesday, signals of a possible further increase in OPEC+ production have been circulating in the media as OPEC+ expects that global inventories could fall sharply if there is no further increase in production.
On Monday, May 31, the media cited the contents of a new OPEC+ Joint Technical Committee (JTC) report that met that day, saying the committee, which oversees market conditions and OPEC+ compliance with production cuts, expects a global oil inventory glut to be gone by the end of June this year, with inventories accelerating from September and falling by at least 2 million barrels per day from September to December. By December, inventories in developing countries will stand at 109 million barrels, below the average for 2015 to 2019.
The report argues that even if the currently agreed-upon production increase is completed, OPEC+ producers still have significant idle capacity, theoretically nearly 6% of global supply. There is still plenty of room for OPEC+ to increase production in the subsequent part of this year. If OPEC+ does not continue to increase production after July this year, global oil inventories will fall at an average rate of 1.4 million barrels per day next year, down significantly more than the 1.2 million barrels per day expected in April this year.
Another media source said that the JTC meeting this Monday confirmed OPEC’s previous global oil demand expectations for this year, still expecting demand to increase by 6 million bpd to 96.5 million bpd in the second half of the year, without raising expectations, but lowering supply expectations for non-OPEC+ countries.
If true, OPEC’s global demand forecast should be comparable to that of the International Energy Agency (IEA), which concluded in its May report that the current crude glut is over, although the Indian epidemic has cut demand expectations. “Under the current OPEC+ production scenario, supply growth will not catch up with the expected recovery in demand; global crude oil demand is expected to rise from 93.1 million bpd in the first quarter of 2021 to 99.6 million bpd by the end of this year as vaccination rates rise and travel restrictions ease.”
The OPEC+ meeting in early April this year decided to increase production by 1.15 million bpd in stages from May to July, with Saudi Arabia completely withdrawing its voluntary additional 1 million bpd cut during that period. This equates to a combined OPEC+ production increase of more than 2 million bpd in three months, with the March cut scaled back by a quarter.
As mentioned in a Wall Street Journal article over the weekend, analysts generally expect OPEC+ to meet this Tuesday to confirm plans to continue increasing oil supply in July, with most analysts predicting that OPEC+ will approve an additional 840,000 bpd of production in July, thus completing the process of restoring more than 2 million bpd of oil production this summer.
Some media outlets noted that this week’s OPEC+ meeting will not come up with any decisions on policy changes beyond July, but any hints given by ministers of OPEC+ agreement countries will be closely watched. They will do preliminary discussions on future actions and then probably not make a decision until the meeting in late June or early July. The strong recovery in fuel consumption in Europe and the U.S. could spark some controversy. Russia and the UAE have typically been more aggressive than other OPEC+ countries like Saudi Arabia in boosting sales and taking advantage of rising oil price actions.
No fear of Iran’s return to global oil market
At the time of the April meeting this year, OPEC+ expected global demand to grow despite a worsening epidemic in India and a surge in cases. international crude continued to move higher after the April meeting, accumulating more than 30% since the beginning of the year, with Brent crude approaching $70 per barrel. However, progress in the Iran nuclear deal negotiations and the prospect of a renewed Iranian nuclear deal have curbed the recent crude oil rally.
The media noted that Iran is keen to reach an agreement on restarting the Iran nuclear deal before the domestic presidential election on June 18. If reached as hoped, Iran could quickly ramp up oil exports if the U.S. lifts sanctions on Iran.
After the JTC meeting this Monday, OPEC Secretary General Barkindo (Mohammad Barkindo) said there are changing circumstances in terms of factors affecting the global oil market, including the rate of change during the epidemic. OPEC+ remains a reliable factor affecting the stability of the oil market.
Barkindo said he does not expect the increase in supply from Iran to create problems. “We expect that the return of Iran’s oil production and exports to the global market will be orderly and transparent and, therefore, will maintain the relatively stable situation that we have been trying to reach since last April.”
As mentioned in last week’s Wall Street News article, even after the retreat, “commodity flag-bearer” Goldman Sachs is still long on oil prices and expects international oil prices to reach $80 per barrel by the end of this year. Goldman Sachs recently reported that the market now expects Iran to resume crude oil exports this summer, but the mainstream expectation “underestimates the upcoming demand rebound”. Crude oil demand from developed countries such as the U.S. is expected to exceed current market expectations due to economic restart and tourism, which will partially offset the impact of the epidemic on crude oil demand in South Asia and Latin America.
Goldman Sachs also acknowledged that there is still uncertainty in the oil price market, when Iran will resume crude oil exports will become the key. If Iran restarts crude oil exports in July, Brent crude oil will not reach $80/barrel until the fourth quarter of this year; however, if Iranian crude oil exports are delayed until October this year, Brent crude oil will reach $80/barrel this summer at the earliest.