Why OPEC Is More Important For Oil Than A Vaccine

Vaccine progress or not, the market is riveted with OPEC actions. And that is because the industry is well aware that even the most promising of vaccine news won’t have much effect on oil demand until at least the second half of 2021. What will have an effect on the oil market - or rather the balance of supply vs. demand - is OPEC.

This week, OPEC has had a couple of meetings. One to review compliance, and one to discuss its next steps. The outcome of the latter would be to take the recommendation so it can be discussed and approved at the full meeting on November 30/December 1.

But it has been tough going. The Joint Technical Committee released a report in the meeting that suggested global oil demand would be lower than previously thought. Now, it sees oil demand growing by 6.2 million bpd over 2020. This isn’t actually new, because this is what they said in the last OPEC MOMR release a week ago. But it is new compared to last month’s MOMR, so it is noteworthy. This represents a downward estimate of 300,000 bpd. That’s a big deal when you’re already up against it with oil inventories. What this means is that OPEC’s original to ease up on the current production quota will no longer have the same effect on oil inventories - because in 2021, oil demand will be 300,000 bpd less than when the original plan was hatched.

There have been many plans of action proposed. Some suggestions call for even deeper cuts - this idea isn’t terribly popular, although seemingly sensible given OPEC’s lowered estimation of oil demand. Another option is to ease up on the group’s current level of cuts as planned in January - by 2 million bpd - but it is debatable whether the current demand outlook supports this level of production. The most popular suggestion so far has been to extend the current level of cuts by an additional three to six months - with three being the clear frontrunner.

But just because most of the members seem to favor this idea doesn’t mean that will be the chosen scenario.

There are detractors, as usual, but it isn’t necessarily the usual detractors. First, Iraq - notorious for its under compliance - has intimated that it will sign on to any agreement provided that the agreement is unanimous - they might as well have said that they will not support an agreement (ostensibly to keep the current level of production through March) should anyone else refuse to sign on. And there are others who have said they absolutely do not agree.

Take Libya, who has said it will not be subjected to production quotas until its production has stabilized at 1.7 million bpd. This seems fair given their rocky history this year and obvious oil revenue declines as a result of the blockades. However, other countries can make fair cases of why they have suffered economic hardship as well. 

Rumors also surfaced that the UAE was thinking about withdrawing from OPEC altogether, as it mulls the pros and cons of OPEC membership - with the pros being OPEC’s clout (which is waning) and the cons being the painful production cuts that its budget just cannot afford. No doubt the prospect of maintaining this painful level of production cuts into March - or even June - seems like a daunting task. The UAE has since reaffirmed its commitment to OPEC, but stopped short of denying that the matter had been discussed. However, the statement - by an unnamed source that ended up writing an article without using an author’s name - came right after the ADIPEC meeting, which means it possible that ADNOC officials had discussed this in the normal course of due diligence - with the likelihood of the UAE dropping out of OPEC - with its friendly Saudi Arabia ties - slim, but scary nonetheless. 

Meanwhile, Saudi Arabia is breaking out a mighty big stick, saying that the days of the Kingdom under producing (or rather, over complying with its share of the production cuts, which are already the largest), are over. Saudi Arabia carries a lot of weight here, which cannot be underestimated. In September, UAE energy minister Suhail al-Mazrouei was seated right next to  Prince Abdulaziz at the JMMC after his country produced oil beyond their quota in August - but it is important to note that the two had a “private discussion” prior to the OPEC+ Joint Ministerial Monitoring Committee, which no doubt consisted of a decisive wrist slap for the UAE’s overproduction. The UAE was quick to promise lowered production in October (which likely coincides with lower associated gas needs and maintenance season). The result of this Saudi wrist slap is clear: the UAE’s production dropped from 2.758 million bpd in August, to 2.515 million bpd in September, and 2.441 million bpd in October, showing it is a dutiful subject of the OPEC agreement and Saudi Arabia.

It is still very possible that there will be no resolution yet come November 30/December 1 as the group continues to squabble over the best path forward, and the group may want additional market data to work with before it makes such a decision, so we may see a late decision closer to the January 1 expiry of the current level of cuts. The most likely scenario, whenever it is finally agreed upon, is a three-month extension.