Opec and its non-Opec partners meet today to decide on crude output quotas beyond July, with growing calls for them to continue ramping up production to help temper a projected supply deficit in the second half of the year and to cool an overheating market that has led oil prices to their highest level in over two years.
But with concerns over the spread of the new Delta variant of Covid-19 and the impact it could have on global demand in the coming months, the group will be wary of bringing back too much oil, too soon. Deliberations began on 29 June at the group's Joint Technical Committee (JTC) meeting, which typically examines market conditions and sets the tone for the discussions that follow. The Joint Ministerial Monitoring Committee (JMMC) will meet this afternoon and that will be followed by the full Opec+ ministerial conference.
At the JTC meeting, Opec secretary-general Mohamed Barkindo said global efforts to manage the spread of Covid-19 have "led to significantly improved oil market conditions and prospects for future growth". And in an internal document seen by Argus, the JTC highlighted its optimistic outlook for transport fuels demand in the Americas, as well as in Europe where "oil demand is projected to show healthy performance" towards the later part of the second quarter. In China, it flagged "positive macroeconomic indicators" that should remain supported by "a surge in exports and respectable improvement in manufacturing". Furthermore, in the JTC's base case scenario — in which both global demand and non-Opec supply grow at the same level as forecast in June's issue of Opec's Monthly Oil Market Report (MOMR) — the market would be in a 1.6mn b/d deficit in the third quarter and a 2.2mn b/d deficit in the fourth quarter if the Opec+ group decides not to increase output beyond July.
With this in mind, several Opec+ delegates have been talking up the merits of raising the group's collective production ceiling in August, possibly by up to 500,000 b/d — the maximum monthly adjustment that the coalition has agreed to make in either direction since the start of the year. The group has been gradually raising production since May. At the same time, Saudi Arabia has been unwinding an additional 1mn b/d cut that it implemented in February-April. By the end of July, this will have brought over 2mn b/d of Opec+ production back onto the market.
Given the size of the potential deficit in the second half of the year, there have also been calls for a bigger increase in next month's output quota than 500,000 b/d. Non-Opec Russia, which typically pushes for larger and more frequent production increases, is among those to have tabled such an option, according to one Opec+ delegate. Another told Argus after the JTC meeting that they felt the market "could absorb more" than the mooted 500,000 b/d. However, the spread of the more infectious, and possibly more deadly, Delta variant of Covid-19 in many parts of the world, coupled with the conservative approach to market management historically adopted by Opec's de facto leader Saudi Arabia, make it more likely than not that the group will settle on a figure closer to 500,000 b/d.
Market direction
Although the focus will be on what Opec+ decides for August, any forward guidance that the group chooses to give today will be equally important, not just for the second half of the year, but also into 2022, as this will provide some much-needed reassurance and direction to the market. One delegate says the group could lay out some kind of roadmap charting policy over the coming few months while retaining its monthly review. This would allow the producer group to stay "nimble", a quality Saudi energy minister Prince Abdulaziz bin Salman has always promoted.
Should the alliance agree to raise its production quota by 500,000 b/d in August, that would bring its collective output cut down to under 5.3mn b/d from the 9.7mn b/d that was originally implemented in May 2020 during the height of the first wave of the pandemic. Under the current plan, the group would then have until the agreement expires in April 2022 to unwind the rest of the cut.
But if the group does bring back the remaining 5mn+ b/d as planned, projections on 2022 supply and demand balances laid out by the JTC show that the oil market could face yet another serious supply overhang of anywhere between 2.5mn b/d and 5.5mn b/d by the fourth quarter of next year. "The very nature of market dynamics and the current significant uncertainties calls for prudence, particularly in remaining agile and avoiding any risk when looking at the potential for global market imbalance after April 2022," the JTC said.
Although one delegate acknowledged that this could be an issue of concern, they thought it unlikely to be a point of discussion at today's meetings.
