Surprise, Surprise - Setbacks to Iranian, OPEC+ Talks Rattle Market for Crude Oil

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.

Much like the world at large, the crude oil market has been healing from the ravages of COVID-19. Overall, market conditions are far better than they were in April 2020, when global oil consumption, crushed by pandemic-related lockdowns, slumped to 80.4 MMb/d, a 17% decline from the start of last year and a 20% drop from April 2019. Demand has been rebounding in fits and starts for a full year now — recovering from downturns is what markets do. But this recovery has gotten a big assist: 10 members of the Organization of the Petroleum Exporting Countries (OPEC), acting in concert with 10 non-members, have restrained crude oil production in a program unprecedented in scale and duration. Now, oil prices are high enough to revive activity by some producers outside the so-called OPEC+ group. For at least the rest of this year, in fact, the market looks like a steel-cage match between crude supply subject to coordinated management and supply governed only by raw market signals. Today, we look at oil-market projections from three important agencies and estimate demand for oil not supplied by the OPEC+ exporters.