UAE says OPEC adding 1.5 mil b/d in April hinges on vaccine rollout, demand recovery
The chance of OPEC and its allies agreeing to increase crude output by 1.5 million b/d for April will hinge on a successful rollout of the COVID-19 vaccines and its impact on demand as the group seeks to lower inventories, the UAE’s energy minister said.
“Whether the market can absorb an additional 1.5 million b/d of OPEC supply come April will depend on the success of the vaccine rollout, and how that impacts demand recovery,” Suhail al-Mazrouei told the Gulf Intelligence quarterly publication emailed on Feb. 28. “We also need to look beyond balancing supply and demand to inventories that may build up during 2021, and we are still trying to reduce those to a normal level.”
OPEC+ ministers, led by Saudi Arabia and Russia, are set to meet on March 4 to decide on production levels for April after recommending at their Joint Ministerial Monitoring Committee meeting on Feb. 3 to hold quotas steady through March, rather than increase output by 500,000 b/d as planned. Saudi Arabia also voluntarily said it would cut its output by 1 million b/d for February and March. It is not clear if all 1.5 million b/d of the output cuts will be returned all at once for April.
In February and March, Russia and Kazakhstan were given special dispensation to slightly increase their quotas, while all other members agreed to keep their quotas unchanged.
OPEC, Russia and eight other oil-producing allies are gradually easing their historic 9.7 million b/d of output cuts instituted during the worst of the coronavirus crisis in 2020. For January, the cuts were rolled back to 7.2 million b/d, or roughly 7% of pre-pandemic demand, from 7.7 million b/d in December.
The alliance has loosely targeted a tapering of the cuts to 5.8 million b/d by mid-year.
Mazrouei called for producers to implement a “phased manner” of output increases to meet an expected oil demand uptick.
“We have had a better than anticipated start to recovery in January and now expect to see demand back to 2019 levels by the beginning of 2022,” Mazrouei said. “What is even more critical than prices and a balanced market is ensuring that we continue to incentivize capital investment in new supply to ensure that the volumes are there when demand recovers.”
The minister, who had before cautioned US shale producers against taking advantage of OPEC+ cuts and boosting output, reiterated his stand.
“All producers need to be careful not to over flood the market. If not, prices will suffer and so will investment,” he said. “Having said that, it’s not going to be easy for US producers to build up output given the inventory levels we see today. They need to be cautious.”
OPEC+ is not now looking at defending its market share, although it expects to regain lost ground once demand recovers to normal levels, the UAE minister said.
“We’re not looking at this from a market share point of view,” he said. “Having said that, as the lowest cost producers, we know that when the situation returns to normal, we could easily retrieve that. Today’s focus is to balance the market and incentivize investors to ensure we have enough hydrocarbons in two to three years.”
The UAE, OPEC’s third largest producer that has been vocal about pushing for further easing of quotas, wants to boost its compliance to over 100% since it’s a member of the JMMC, Mazrouei said.
“As an example, the UAE has an installed capacity of more than 4.2 million b/d, but we are working with the group to cut significantly from that volume,” he added.
The minister reiterated the UAE’s commitment to stay in OPEC, despite previous rumblings that the producer wanted to exit the group amid plans to boost its oil output capacity. Abu Dhabi National Oil Co., the UAE’s biggest energy producer, is set to ramp up its oil production capacity by 25% to 5 million b/d by 2030 and plans to launch the Murban futures contract on an Abu Dhabi-based exchange on March 29. Murban is ADNOC’s flagship crude and accounts for about half its current oil production capacity.
“Our benefit is to stay within the group,” he said. “I am also confident that the investments made in Murban and the efficiency improvements done by ADNOC will enable us to compete because the volumes will be needed. At the end of the day, it’s the cost of production that matters and the demand recovery beyond the pandemic is way above what we are producing today.”