OPEC’s Undecided Position On Production Review Sustains Oil Price

Yemisi Izuora

The Organisation of Petroleum Exporting Countries, OPEC and its allies are very much going to consider increasing output in coming month.

The Organisation’s officials met virtually yesterday to discuss output, and nearly everyone appear to believe that pproduction incresses are coming. Benchmark oil prices are up about 1.9 per cent, after gaining 54 per cent during the first half of 2021.

Surging demand was the story of the first half of 2021 and the global economy has done better than almost anyone expected coming out of the pandemic-induced recession of 2020, pushing up the price of oil and other commodities.

The meeting with Russia and other allies was with a better command of world oil prices than it has had in years, analysts said.

OPEC+ and its allies, are expected to consider adding between 500,000 and 1 million barrels per day, but analysts said there is some talk it may consider no increase.

Oriental News Nigeria, reports that the Goldman Sachs Commodities Research has demanded for more oil production from the Organization of the Petroleum Exporting Countries and allies (OPEC+) to balance the market by 2022 as supply risk looms elsewhere.

The U.S. bank forecast oil demand to rise by an additional 2.2 million barrels per day (mbpd) by year-end, leaving a 5 mbpd supply shortfall, well in excess of what Iran and shale producers can bring online, it said in a note dated June 29.

“While a large new infection wave could slow the market rebalancing, we expect OPEC+ to remain tactical in its output hikes with downside risks to global supply elsewhere pointing to a more robust outlook for crude and the upstream sector than petroleum products and the downstream sector,” Goldman said.

The bank sees a base case of 0.5 mbpd supply increase from OPEC+ producers for consecutive months, when the group meets on July 1 to discuss the threat of the Delta COVID variant, the potential return of Iran production and still slow shale response.

The Delta variant of the coronavirus is more infectious and is likely to gain more traction over other variants.

However, boosting broad recovery hopes, Mohammad Barkindo, Secretary General of OPEC said on Tuesday that demand is expected to rise by 6 mbpd in 2021, with 5 mbpd of that in the second half of the year.

Reuters reported that an internal OPEC report points out that the market could fall back into an oil glut after the group reverses its 6 million barrels a day of production cuts by April 2022.
The report gave a boost to oil prices Wednesday.

Brent crude futures the international benchmark, were trading just over $75 a barrel Wednesday while West Texas Intermediate crude  crude futures for August were just under $74 a barrel, around their highest level since the fall of 2018.

“This is their most important meeting in over year. They were staring down a grave situation with negative pricing last year, and they came together,” Again Capital partner John Kilduff said. “The plan has been to return 500,000 barrels a month, and I think they’ll stick to that. It’s working for them because prices keep going higher and higher.”

OPEC is expected to consider extending its current production accord beyond the existing April 2022 end date, and analysts widely expect it to return 500,000 barrels to the market in August.

“To me, the interesting story is if they roll over current cuts, how high do [prices] go. It’s being discussed in terms of the potential options,” RBC head of global commodities strategy Helima Croft said. She said the market has already priced in 500,000 barrels a day of additional production, and if it was higher than expected, prices would fall slightly.

Croft said OPEC+ has become more flexible since Covid, and it can quickly adjust when it sees how big factors will affect the market.

For instance, the U.S. and Iran have been discussing a new nuclear accord. If that happens, Iran could return at least 1 million barrels a day to the market. The timing of that is unclear, and that oil would have to be absorbed alongside OPEC’s current production later this year if a deal is struck.

“OPEC used to move like a battle ship. We had these biannual meetings. It was so hard to convene OPEC” during Covid, Croft said. She noted that OPEC operates now more like the U.S. Federal Reserve, with regular policy-setting meetings.

“It means they really have directional control of the market,” she said.

The OPEC,  led by Saudi Arabia initiated monthly meetings this year, with the oil market in a state of flux as demand returns. OPEC Secretary General Mohammed Barkindo said Tuesday that OPEC expects demand to rise by 6 million barrels per day this year, with 5 million of that coming back in the second half of the year.

“Now with the monthly meeting structure, they’re more like a speedboat as opposed to a battleship. If the Delta variant is really demand-destructive in key geographies, they can reverse course,” Croft said. “To me, this monthly meeting structure has given them flexibility to adjust quickly. And for market participants, everybody has to tune in. They are the story. … This is how things have changed from 2015 when they were written off as irrelevant.”

Big changes in the market also changed OPEC, which had to cut production sharply last year as demand cratered and oil prices collapsed. Of less concern has been pressure from U.S. shale producers, who had previously moved aggressively to add new wells every time prices rose.

In the U.S., the politics of oil has also changed dramatically.

The Biden administration is more focused on climate and renewables. The Trump administration had been set on growing a stronger, less-regulated oil sector. During that era, the U.S. grew to be the world’s largest oil producer.

“They OPEC members have the wind at their back,” Croft said.

She said they see the oil majors with ESG mandates, and the new focus of courts and the U.S. government.

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