Third Dimension - OPEC+ Adjusts as Crude Oil Comes into View for 2022

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.

Oil traders had two powerful reasons to fret when the OPEC+ group ended its meeting earlier this month without agreeing how to extend the phase-down of its 4½-year-old program for limiting crude oil supply, a surprise development we first blogged about in What a Fool Believes. As we observed in Everybody Wants to Rule the World, the oil market nearly always has some mechanism for keeping supply in line with demand and tends to become chaotic when the system breaks down. That happened in mid-2014, when Saudi Arabia and other key OPEC members abandoned production restraint to defend market share (see Crying Time for OPEC?), unbridling competition and starting a price slide that cost crude oil three-fourths of its value before the market began slowly to regain balance in February 2016. Hurting financially along with oil producers everywhere, OPEC’s leaders reversed course and, at the end of 2016, agreed with a group of non-member countries — Russia prominent among them — to reimpose production cuts at the beginning of 2017 under an early version of the current agreement (Is This the Real Life? Is This Just Fantasy?). The OPEC+ effort accelerated the market’s recovery from price-crushing oversupply but splintered in a dispute between Saudi Arabia and Russia at the worst possible time: in March 2020, just as the COVID-19 pandemic was devastating global oil demand, which we covered in Wipe Out. With crude prices plunging, the group introduced an overhauled framework of production cuts the following month, agreeing to step down the amount of oil it was holding off the market by an estimated 9.7 MMb/d. Things went smoothly until this month’s meeting, at which the group was to decide how to manage the remaining 5.8 MMb/d of production cuts. When the meeting ended without an agreement, it looked like the potential for a replay of the March 2020 dust-up, which was reason enough for market paranoia. Even worse, the rift this time didn’t occur along the natural fault line between Saudi Arabia and Russia, which doesn’t belong to OPEC, but between two OPEC members usually allied in matters concerning oil production: Saudi Arabia and the UAE (Surprise, Surprise).

Once again, though, OPEC+ participants resolved the dispute with flexibility and compromise. The UAE had withheld its support for an extension of the group’s agreement past next April because it wanted its baseline from which production cuts are calculated to be raised from just shy of 3.2 MMb/d. Claiming to be able to produce 4 MMb/d of crude oil, nearly all of it from Abu Dhabi, the federation is reported to have argued for a baseline of 3.8 MMb/d starting next May. In an agreement announced on July 18, the OPEC+ group raised the UAE’s baseline to 3.5 MMb/d. Additionally, OPEC made other baseline changes, also starting in May 2022: Iraq, to 4.8 MMb/d from 4.7 MMb/d; Kuwait, to 3 MMb/d from 2.8 MMb/d; and Saudi Arabia and Russia, to 11.5 MMb/d from 11 MMb/d each. In all, OPEC+ baselines in next year’s second quarter will increase by a little more than 1.6 MMb/d. The effect of the changes, if cuts are removed in 400 Mb/d monthly increments as planned, will be an average production increase throughout 2022 of 1.1 MMb/d. We’ll use that important increment to adjust forecasts for 2022 a little later.