Despite the OPEC+ decision to ease output cuts, oil prices have rallied over the past couple of weeks, supported by vaccine news and the start of vaccination campaigns across the world. Although the OPEC+ decision is seen as a compromise among the major group producers, the group has clearly realized that their decision is also a warning for the member states that are falling behind on their compliance targets. Adding 500,000 bpd starting from January will mean that many countries including Russia and Iraq which contributed to almost half of the 2.35 million barrels excess supply in 2020 will see their compliance exceeding 100% if they stick to their agreed new production targets.
Saudi Arabia and Russia will share 50% of the agreed ease of output cuts
According to Russian energy minister Novak, his country’s share of the incremental rise will be 126,000 bpd while Saudi Arabia is expected to have an equal share. This means that Saudi Arabia and Russia will have a quota of 9.119 million bpd in January, followed by Iraq at 3.857 million bpd and UAE at 2.626 million bpd. The total OPEC production quota is estimated to be 22.119 million bpd, up by 304,000 bpd from its quota between August – December , while the rise in non-OPEC quota is estimated to be 196,000 bpd.
On the other hand, the risks associated with this decision will include a slow demand recovery, especially in Q-1 2021 as COVID cases continue to surge, and uncertainty about the speed and effectiveness of the global COVID vaccination campaigns continues.
Another risk is the rise in production especially from Libya and Norway. Libyan production currently stands above 1.2 million bpd and is likely to keep on rising, while Norway will be ending its voluntary output cuts at the end of 2020, which means its production will return to 1.75 million bpd in 2021, up by 134,000 bpd. The production capacity of Norway’s huge Johan Sverdrup field alone is already expected to reach 720,000 bpd by Q-4 2022
As a whole, OPEC+ is expected to add 500,000 bpd on a monthly basis to reach a total of 2 million bpd in additional production in April 2021. Yet, this plan will be subject to recommendations of JMCC, the committee that monitors OPEC+ production, which is set to hold its next meeting in January 2021.
From now till Christmas, we expect oil markets to keep the current momentum going, propped up by news of vaccine developments, and a weaker dollar. The recent move by Saudi Aramco to raise its OSPs to Asia by $0.80 should support this momentum further. Another pillar of support is the investor exodus from safehaven assets such as gold and the US dollar to high risk equities and commodities.
Demand seen weaker in the US, but future looks bright
US oil demand is slowing, and despite the decline in crude oil stocks in the United States last week, gasoline and diesel inventories have risen mainly due to persistent lockdown measures and end of year winter season demand.
Current apparent demand in the US stands at 15.96 million bpd, down by 705,000 bpd w/w, falling to the lowest level in four weeks. The last EIA inventory report was somewhat bearish as it revealed unexpected growth in gasoline and diesel inventories, which rose by 3.5 million barrels, and 3.2 million barrels, respectively. Current crude oil stocks stand at 488 million barrels, just within the five year average, 52.7 million barrels below their peak levels last July, yet 37.5 million barrels above their level a year ago. Nonetheless, the trend has been quite stable over the last four weeks, reflecting a much slower pace of decline compared with the pace of decline seen between August-October. Although it is still early for OPEC+ to celebrate, current levels should provide some relief if they are compared with the market’s abysmal status earlier this year, which shows that the group is on the right track.
The number of US rigs continues to rise, reaching 246 rigs, up by 74 rigs from its lowest level seen last August, yet with a muted effect on prices as the bullish news continue to outweigh a potential rise in US production. Meanwhile, prices are near $50, something we had predicted back in June, pointing at what looks like the beginning of a real recovery.
