London — OPEC and its allies on August 1 will officially begin easing off their record production cuts, hopeful that recent bearish economic and pandemic data will not seriously erode the oil demand growth they are expecting.
After having slashed their crude output by about 9.7 million b/d since May, the OPEC+ alliance is scheduled to relax its quotas by 2 million b/d from August through the rest of the year, betting on a pick-up in global fuel consumption and better preparedness by governments to prevent another spike in positive novel coronavirus tests.
The oil market, however, may not share the same optimism. Crude prices, which had held largely steady since June, tumbled July 30 amid a flurry of bearish indicators, including dismal US GDP figures and a rise in positive coronavirus tests to more than 17 million, according to Johns Hopkins University.
OPEC+ officials say they are monitoring the trends but have no plans to go back on their upcoming output surge, citing demand growth from the easing of lockdown measures in many countries, as well as seasonal increases in crude burn for power generation in the summer months.
The coalition appears eager to reclaim some of its lost market share, while not allowing the market to overtighten and unlock a wave of supplies from the US and other producers outside the group.
"Today, the market situation has improved and reached some sort of stabilization," Algerian energy minister Abdelmajid Attar, who holds OPEC's rotating presidency this year, told S&P Global Platts in an interview. "Should market conditions deteriorate significantly in the future, OPEC stands ready to enter into consultations and consider further actions, in cooperation with non-OPEC participating countries."
OPEC+ officials note that they are expecting Iraq, Nigeria, Angola, Kazakhstan and a handful of other members to make voluntary additional cuts in August and September to make up for pumping more crude than their quotas in May and June, under the terms of their production accord.
Those so-called "compensation cuts" will offset some of the increased production that the rest of the alliance plans to bring online.
OPEC+ has not revealed the exact schedule of the compensation cuts, but internal OPEC+ analysis seen by Platts shows that 13 members – more than half of the 23-country coalition – exceeded their quotas by combined 843,000 b/d in May and June.
Compliance is being adjudicated by a nine-country monitoring committee co-chaired by Saudi Arabia and Russia, who have put intense diplomatic pressure on their counterparts to adhere to their commitments.
"I don't think we're going to have any more free riders, at least for the next few months," one OPEC+ delegate said, speaking on the condition of anonymity.
Anticipating strong demand
The committee is next scheduled to meet August 18 online to review compliance and assess market conditions. It can recommend any changes to the production cuts, which would then need to be approved by the entire alliance in an emergency meeting.
The first signs of any shift may come when Saudi Arabia and other core OPEC producers set their official selling prices and allocate their export volumes for September over the next two weeks.
OPEC+ analysis prepared before the previous monitoring committee meeting on July 15 strongly endorsed staying the course with the planned quota easing in August.
The alliance is expecting a supply-demand deficit of 6.4 million b/d in the fourth quarter of 2020 and for global oil inventories to fall by the end of the year to 104 million barrels below the five-year average that OPEC+ members have said they are targeting, according to the analysis seen by Platts.
Inventories were 210 million barrels above that benchmark as of the end of May, according to OPEC.
Stock levels will then fall further in 2021 to 449 million barrels below the five-year average, the analysis shows. This assumes full compliance among OPEC+ members with their quotas and that exempt members Iran, Venezuela and Libya do not see their production rise significantly from current levels.
Stephen Brennock, an analyst with brokerage PVM Associates, said the projections, as well as those by the International Energy Agency and US Energy Information Administration that see strong demand rebounds in Q4, appear overly rosy.
"Given the uncertainty surrounding the trajectory of the pandemic, the risks for the oil demand outlook are firmly skewed to the downside," he said. "In short, the recovery in demand will turn out to be slower than expected."
Second wave concerns
The secretariat, which presented the analysis to ministers on the key monitoring committee on July 15, also modeled a less bullish scenario where the global economy sputters and a second wave of novel coronavirus infections hits Europe, US and China. In that case, stocks remain elevated through the end of 2021, indicating that the OPEC+ alliance may need to reimpose larger production cuts.
But OPEC+ officials say they believe world leaders now have a better handle on how to quickly contain the spread of infection and mitigate any economic impact.
"The world is certainly much better prepared to [address] COVID-19 now than in the beginning of the year," Attar said.
Saudi energy minister Prince Abdulaziz bin Salman made similar comments at the last monitoring committee meeting, telling reporters: "The amount of learning that has happened over the last six or almost seven months is sufficient for us to say that whatever may happen will be most likely contained."
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