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Opec+ keeps oil market in deficit

The raising of the production limits by Opec plus oil producers is positive for oil in both short and medium-term as the 400,000 barrel per day monthly supply additions should still leave the oil market in deficit at the end of 2021, research analysts at Merrill Lynch said.

They argue that a change in baseline production levels does not mean an immediate 1.6 million b/d hike from April 2022 and will mostly redistribute quotas within Opec+. “Production quotas may be adjusted on the way, while baseline production changes signal a general commitment from the key member,” analysts Karen Kostanian and Ekaterina Smyk said.

“Production quotas may be adjusted on the way, while baseline production changes signal a general commitment from the key members,” they said.

In July, Opec+ nations raised the output limit imposed on five countries, including the UAE, by phasing out 5.8 million barrels per day of oil production cuts by September 2022.

The analysts allayed concerns that oil prices would run into some turbulence post the latest Opec+ agreement as the market feared upcoming supply hikes and importantly the select members potentially flooding the market in 2022 with cumulative 1.6 million b/d additions to baseline production levels.

Last week, oil settled lower in three consecutive sessions amid fears that the faster-spreading Delta variant would slow fuel demand in China and the rest of Asia. As of 8:41 a.m. EDT on Friday, WTI Crude was up 0.59 per cent at $69.80. Brent was trading up 1.14 per cent at $72.10.

Most oil market experts also believe that the Opec deal last month, marking the end of a gridlock, will help cool prices which have climbed to 2-1/2 year highs as the global economy recovers from the coronavirus pandemic.

As part of the latest agreement, Russia should be able to add 100,000 b/d each month starting from August (its 25 per cent share of Opec+ quota) and its baseline production level will be increased from April 2022 by 500,000 b/d to 11.5 million b/d for crude only.

“First, the reversal of 500,000 b/d by the end of 2021 means oil production (crude + condensate) could reach almost 11 million b/d, just 3.0 per cent below pre-Covid levels. Should Opec+ continue to add 400,000 b/d per month in Q1, Russia essentially would be allowed to fully restore production by the end of Q1 2022. Second, the baseline crude production of 11.5 million /d practically means that Russia would have to produce roughly 1mn b/d above its historical maximum,” Merrill Lynch analysts said.

“We hence believe that Russia is highly unlikely to reach its baseline levels on a 1-2 year horizon considering flat capex levels over the past couple of years. The next big growth project is not expected to come online before the mid-2020s,” they said.

Preliminary Bloomberg survey for Opec production shows that the group increased crude production by 0.4 million b/d month on month in July as part of the Opec+ agreement to reverse 1.15 million b/d of the cuts through May-July.

Saudi led an increase adding close to 0.5 million b/d which was offset by small declines in production across other producers. Iranian production was almost flat in July (+30,000b/d).
Source: Khaleej Times

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