The signs going into OPEC’s bi-annual meeting in Vienna were broadly positive. On one hand, you had some key members – including Iraq, surprisingly – stating the need for the broader OPEC+ club to make further cuts to its supply deal. On the other hand, there was Saudi Arabia, which needed a win to support Saudi Aramco’s upcoming IPO. What emerged was a little something for everyone, that was still broadly positive but scant on the details.
The headlines spinning out of the December 5 meeting was that the OPEC+ alliance agreed to slash a further 500,000 b/d, with Saudi Arabia pledging an additional voluntary cut of 400,000 b/d. Collectively, this would raise the club’s total supply reduction to 2.1 mmb/d – or over 2% of global oil demand – up from the previous 1.2 mmb/d target. Beneath those headlines, however, the details of the new adjustment to the deal were murkier. The 500,000 b/d cut is, in fact, more of a formalisation of the current production levels within OPEC. It won’t remove additional barrels from the market, but it won’t add them back into global supply either.
Saudi Arabia is, once again, key to this equation. Even with the attacks on the heart of its crude processing facilities in September, Saudi Arabia has been shouldering the extra burden within the deal, making up for errant members that have consistently overshot their quotas. These include Nigeria and Iraq, and crucially Russia. The caveat that the new targets – especially Saudi Arabia’s voluntary portion – will only come into force if all members of the OPEC+ club implement 100% of their pledged cuts underscores the Kingdom’s new, more hardline stance that full compliance is required before it makes additional concessions. Because even with the declines in Venezuela and Iran, Saudi Arabia has trimmed its output to below 10 mmb/d in an attempt to show leadership through example. But its patience is now wearing thin.
But it is those details that are sketchy right now. OPEC states that the new deal formalises current production levels and will make up for Saudi overcompliance by ‘redistributing’ those volumes across other OPEC+ members. But no specifics on that split were given – a worrying sign that more arguments were coming – with the group preferring to meet compliance first before moving on to the fresh cuts.
Full adherence to the targets is tough. But it might get easier. Russia – which has only met its quota 3 months this year, when the Druzhba oil pipeline crisis hit – won a significant concession. Its argument that the only reason it was not hitting its target was due to condensate production, a by-product of its increasing natural gas output, was accepted; the quotas will exclude condensate, and Russian Energy Minister Alexander Novak was optimistic that it could meet its quota of a 300,000 b/d reduction for the first quarter of 2020. And the first quarter of 2020 is crucial, as that is the remaining length of the supply deal. Ahead of the March 31 expiry in 2020, OPEC has agreed to hold an extraordinary general meeting to assess the situation – the point which the deal either ends or is extended.
Underpinning this bet is some sentiment-based optimism from OPEC. The rise and rise of US shale has diluted OPEC’s impact over the past five years, requiring it to make deeper and deeper cuts that were muted by increasing amounts of American crude. But OPEC is betting that the wind will go out of US shale sails next year, hoping that it will allow output within OPEC+ to rise again. But low growth in US shale does not mean no growth. And perhaps for this reason, the price impact on the new OPEC decision has been muted. Despite the club’s attempt to prove that it is still effective, the market simply doesn’t believe the new cut will do much. Crude prices reflect that. Call it cynicism, but the market might have more faith if full compliance was reached and that is exactly what OPEC is striving towards.
The OPEC+ supply deal:
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In a few days, the bi-annual OPEC meeting will take place on November 30, leading into a wider OPEC+ meeting on December 30. This is what all the political jostling and negotiations currently taking place is leading up to, as the coalition of major oil producers under the OPEC+ banner decide on the next step of its historic and ambitious supply control plan. Designed to prop up global oil prices by managing supply, a postponement of the next phase in the supply deal is widely expected. But there are many cracks appearing beneath the headline.
A quick recap. After Saudi Arabia and Russia triggered a price war in March 2020 that led to a collapse in oil prices (with US crude prices briefly falling into negative territory due to the technical quirk), OPEC and its non-OPEC allies (known collectively as OPEC+) agreed to a massive supply quota deal that would throttle their production for 2 years. The initial figure was 10 mmb/d, until Mexico’s reticence brought that down to 9.7 mmb/d. This was due to fall to 7.7 mmb/d by July 2020, but soft demand forced a delay, while Saudi Arabia led the charge to ensure full compliance from laggards, which included Iraq, Nigeria and (unusually) the UAE. The next tranche will bring the supply control ceiling down to 5.7 mmb/d. But given that Covid-19 is still raging globally (despite promising vaccine results), this might be too much too soon. Yes, prices have recovered, but at US$40/b crude, this is still not sufficient to cover the oil-dependent budgets of many OPEC+ nations. So a delay is very likely.
But for how long? The OPEC+ Joint Technical Committee panel has suggested that the next step of the plan (which will effectively boost global supply by 2 mmb/d) be postponed by 3-6 months. This move, if adopted, will have been presaged by several public statements by OPEC+ leaders, including a pointed comment from OPEC Secretary General Mohammad Barkindo that producers must be ready to respond to ‘shifts in market fundamentals’.
On the surface, this is a necessary move. Crude prices have rallied recently – to as high as US$45/b – on positive news of Covid-19 vaccines. Treatments from Pfizer, Moderna and the Oxford University/AstraZeneca have touted 90%+ effectiveness in various forms, with countries such as the US, Germany and the UK ordering billions of doses and setting the stage for mass vaccinations beginning December. Life returning to a semblance of normality would lift demand, particularly in key products such as gasoline (as driving rates increase) and jet fuel (allowing a crippled aviation sector to return to life). Underpinning the rally is the understanding that OPEC+ will always act in the market’s favour, carefully supporting the price recovery. But there are already grouses among OPEC members that they are doing ‘too much’. Led by Saudi Arabia, the draconian dictates of meeting full compliance to previous quotas have ruffled feathers, although most members have reluctantly attempt to abide by them. But there is a wider existential issue that OPEC+ is merely allowing its rivals to resuscitate and leapfrog them once again; the US active oil rig count by Baker Hughes has reversed a chronic decline trend, as WTI prices are at levels above breakeven for US shale.
Complaints from Iran, Iraq and Nigeria are to be expected, as is from Libya as it seeks continued exemption from quotas due to the legacy of civil war even though it has recently returned to almost full production following a truce. But grievance is also coming from an unexpected quarter: the UAE. A major supporter in the Saudi Arabia faction of OPEC, reports suggest that the UAE (led by the largest emirate, Abu Dhabi) are privately questioning the benefit of remaining in OPEC. Beset by shrivelling oil revenue, the Emiratis have been grumbling about the fairness of their allocated quota as they seek to rebuild their trade-dependent economy. There has been suggestion that the Emiratis could even leave OPEC if decisions led to a net negative outcome for them. Unlike the Qatar exit, this will not just be a blow to OPEC as a whole, questioning its market relevance but to Saudi Arabia’s lead position, as it loses one of its main allies, reducing its negotiation power. And if the UAE leaves, Kuwait could follow, which would leave the Saudis even more isolated.
This could be a tactic to increase the volume of the UAE’s voice in OPEC+, which has been dominated by Saudi Arabia and Russia. But it could also be a genuine policy shift. Either way, it throws even more conundrums onto a delicate situation that could undermine an already fragile market. Despite the positive market news led by Covid-19 vaccines and demand recovery in Asia, American crude oil inventories in Cushing are now approaching similar high levels last seen in April (just before the WTI crash) while OPEC itself has lowered its global demand forecast for 2020 by 300,000 b/d. That’s dangerous territory to be treading in, especially if members of the OPEC+ club are threatening to exit and undermine the pack. A postponement of the plan seems inevitable on December 1 at this point, but it is what lies beyond the immediate horizon that is the true threat to OPEC+.
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In the U.S. Energy Information Administration’s (EIA) November Short-Term Energy Outlook (STEO), EIA forecasts that U.S. crude oil production will remain near its current level through the end of 2021.
A record 12.9 million barrels per day (b/d) of crude oil was produced in the United States in November 2019 and was at 12.7 million b/d in March 2020, when the President declared a national emergency concerning the COVID-19 outbreak. Crude oil production then fell to 10.0 million b/d in May 2020, the lowest level since January 2018.
By August, the latest monthly data available in EIA’s series, production of crude oil had risen to 10.6 million b/d in the United States, and the U.S. benchmark price of West Texas Intermediate (WTI) crude oil had increased from a monthly average of $17 per barrel (b) in April to $42/b in August. EIA forecasts that the WTI price will average $43/b in the first half of 2021, up from our forecast of $40/b during the second half of 2020.
The U.S. crude oil production forecast reflects EIA’s expectations that annual global petroleum demand will not recover to pre-pandemic levels (101.5 million b/d in 2019) through at least 2021. EIA forecasts that global consumption of petroleum will average 92.9 million b/d in 2020 and 98.8 million b/d in 2021.
The gradual recovery in global demand for petroleum contributes to EIA’s forecast of higher crude oil prices in 2021. EIA expects that the Brent crude oil price will increase from its 2020 average of $41/b to $47/b in 2021.
EIA’s crude oil price forecast depends on many factors, especially changes in global production of crude oil. As of early November, members of the Organization of the Petroleum Exporting Countries (OPEC) and partner countries (OPEC+) were considering plans to keep production at current levels, which could result in higher crude oil prices. OPEC+ had previously planned to ease production cuts in January 2021.
Other factors could result in lower-than-forecast prices, especially a slower recovery in global petroleum demand. As COVID-19 cases continue to increase, some parts of the United States are adding restrictions such as curfews and limitations on gatherings and some European countries are re-instituting lockdown measures.
EIA recently published a more detailed discussion of U.S. crude oil production in This Week in Petroleum.
The U.S. Energy Information Administration (EIA) forecasts that members of the Organization of the Petroleum Exporting Countries (OPEC) will earn about $323 billion in net oil export revenues in 2020. If realized, this forecast revenue would be the lowest in 18 years. Lower crude oil prices and lower export volumes drive this expected decrease in export revenues.
Crude oil prices have fallen as a result of lower global demand for petroleum products because of responses to COVID-19. Export volumes have also decreased under OPEC agreements limiting crude oil output that were made in response to low crude oil prices and record-high production disruptions in Libya, Iran, and to a lesser extent, Venezuela.
OPEC earned an estimated $595 billion in net oil export revenues in 2019, less than half of the estimated record high of $1.2 trillion, which was earned in 2012. Continued declines in revenue in 2020 could be detrimental to member countries’ fiscal budgets, which rely heavily on revenues from oil sales to import goods, fund social programs, and support public services. EIA expects a decline in net oil export revenue for OPEC in 2020 because of continued voluntary curtailments and low crude oil prices.
The benchmark Brent crude oil spot price fell from an annual average of $71 per barrel (b) in 2018 to $64/b in 2019. EIA expects Brent to average $41/b in 2020, based on forecasts in EIA’s October 2020 Short-Term Energy Outlook (STEO). OPEC petroleum production averaged 36.6 million barrels per day (b/d) in 2018 and fell to 34.5 million b/d in 2019; EIA expects OPEC production to decline a further 3.9 million b/d to average 30.7 million b/d in 2020.
EIA based its OPEC revenues estimate on forecast petroleum liquids production—including crude oil, condensate, and natural gas plant liquids—and forecast values of OPEC petroleum consumption and crude oil prices.
EIA recently published a more detailed discussion of OPEC revenue in This Week in Petroleum.