Heal Me - OPEC+ Supply Management Faces Tests as Crude Oil Market Recovers

As the outlook for crude oil in 2022 came into three-dimensional view this month, the market’s steadying mechanism managed to right itself again after another wobble. The Organization of the Petroleum Exporting Countries (OPEC) took its first formal look at next year in its July Monthly Oil Market Report (OMR), becoming the third of three widely watched prognosticators to do so. Among the other two, the International Energy Agency (IEA) began projecting 2022 oil-market data in its June Oil Market Report, and the intrepid U.S. Energy Information Administration (EIA) took its first analytical shot at next year way back in January in its Short Term Energy Outlook. The important third dimension that OPEC gave to the 2022 oil-market picture arrived on July 15 after two weeks of worry about whether production restraint by most of the group’s members and cooperating countries would survive. On July 18, though, the internal squabble driving that concern ended in a compromise that will result in production quota increases for several OPEC+ members. The 2022 projections by OPEC, IEA, and EIA, not to mention worry-driven elevation of crude oil prices prior to the compromise, make clear that the market needs OPEC+ to continue the orderly unwinding of its production cuts. In today’s blog, we compare the three forecasts and look at how the latest adjustment to OPEC+ supply management will affect the market.

The November 4 decision by the Organization of the Petroleum Exporting Countries and its collaborators — collectively known as OPEC+ –– to stay the course on crude oil production surprised few and disappointed many. Officials from leading oil-consuming nations, including the U.S., Japan and India, want the group to relax its production restraint by more than the scheduled 400 Mb/d in December. They see extra crude supply as an antidote for high prices that have been hampering recovery from the global economic slump caused by the COVID-19 pandemic. But OPEC+ leaders made clear that they’re in no mood to accelerate their phase-out of production cuts. They know the market pressures now elevating crude prices won’t last forever and can change unexpectedly. They also face internal strains that might weaken the quota discipline that has kept the group’s supply management intact, despite the occasional upset, for nearly five years. One of those strains is the number of OPEC+ participants already producing as much crude as they can while falling short of existing ceilings — a number that grows as the ceilings rise. Today’s RBN blog looks at oil-market expectations underlying OPEC+ members’ cautious approach and at the growing divide among those unable to keep up with output targets and the relatively few but volumetrically overpowering counterparts with capacity to spare.

Oil-production restraint by OPEC and 10 cooperating countries grows more challenging with time, and just when market projections began to hint at relief for the OPEC-Plus group, the spread of the new coronavirus in China and beyond became a sudden and possibly serious impediment to global economic growth and oil demand. Yesterday’s slide in crude oil prices amid newly heightened concern about the potential pandemic’s effects will only add to the challenges that OPEC-Plus countries will face in managing crude supply. So far, the OPEC-Plus group has achieved unprecedented compliance with its production ceilings, which it implemented in January 2017 and has adapted a few times since in response to market pressure. That effort has kept the crude price above the ruinous levels of 2015, memories of which have encouraged quota discipline. But the threat of a major, coronavirus-related slowdown in global oil demand could seriously undermine OPEC-Plus’s efforts, which already had been hurt by dissent within its ranks. Today, we continue our series with a look at Monday’s price drop, the latest supply and demand forecasts and a discussion of the obstacles that might affect OPEC-Plus going forward.