Why OPEC+ is likely to keep its plan to boost oil output
Major oil producers are expected to keep their current oil output agreement in place when they meet on Monday, gradually raising production, but analysts say they’re likely to see increasing pressure to boost output even more with crude prices at their highest in almost three years and energy shortages in Europe and Asia.
With a tighter-than-usual supply picture, Brent crude prices touching highs above $80 a barrel and “demand seemingly poised to cross the 100 million [barrel per day mark] on a more expedited track as COVID-19 restrictions are lifted,” the OPEC+ policy decision on Monday “warrants extra scrutiny,” said Bjørnar Tonhaugen, head of oil markets at Rystad Energy, in a note Wednesday.
The Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, last met on Sept. 1 and agreed to adhere to its July agreement to raise overall production by 400,000 barrels a day each month from August and eventually erase the output curbs put in place last year due to weaker energy demand from pandemic-related economic restrictions.
Since the group is meeting on a monthly basis, the producers will likely “stick to their plan of gradual increases” for at least the coming month, said James Williams, energy economist at WTRG Economics. Previously, when they had three to six months between meetings, the $80 Brent crude prices “would have led them to a greater increase in production.”
But with monthly meetings, the group can “correct a dramatic spike at the end of October without substantial risk,” Williams told MarketWatch.
Still, the pressure on OPEC+ to boost production has grown as regular U.S. gasoline prices at the pump have climbed nearly $1 a gallon from a year ago, according to data from GasBuddy to $3.182 on Wednesday.
Natural-gas prices, meanwhile, recently surged to their highest in over seven years, with the current front-month November futures contract settling at $5.88 per million British thermal units on Tuesday as energy shortages in Europe and Asia have emerged.
Oil prices have also climbed to their highest levels since October 2018, with West Texas Intermediate crude settling at $75.45 a barrel and Brent crude futures prices at $79.53 on Monday.
“OPEC countries are going to want to take advantage of the price increases and increase production even more than the agreed amount,” said Tariq Zahir, managing member at Tyche Capital Advisors. For now, however, OPEC+ is most likely to keep its 400,000-barrel per day increase and merely discuss potentially raising that to keep countries from cheating on the quotas, he said.
Indeed, there have already been calls for higher production quotas, particularly from Nigeria and the United Arab Emirates, “the latter of which supports a 400,000 bpd OPEC+ increase in November,” Tonhaugen said.
“As the UAE-led July meeting stalemate proved, cordial cooperation among OPEC+ members is crucial in keeping the oil market balanced,” he said.
So for the upcoming meeting, OPEC+ will need to decide to “either keeping its conservative 400,000 bpd planned incremental increase, which wouldn’t dramatically shift the needle on oil prices, or to call on some key countries such as Saudi Arabia with sizeable spare capacity to step up production and normalize prices back towards the mid $70s,” Tonhaugen said.
Rystad Energy expects OPEC+ to take on a “wait-and-see approach,” keep its current plan in place for November 2021, particularly as the group “hasn’t demonstrated its ability to ramp up oil supply quickly,” he said. September 2021 OPEC+ oil supply likely fell about 1 million barrels per day lower than the target production level, “as some countries are still falling short of their allotted production quotas.”
In December, the market could see an additional OPEC+ oil demand boost of nearly 1 million barrels per day, “half of which we deem quite likely to materialize from incremental oil-for-power generation in Asia,” said Tonhaugen.
The other half of that demand increase is “more uncertain and hinges on a colder-than-normal start of winter in the Northern Hemisphere,” which could lift oil demand for heating, he said.
Oil demand for December 2021 could jump 3.1 million bpd higher compared to September 2021, said Tonhaugen, which would “create a sustained deficit in global liquids balances through year-end — that is, unless short-term oil supply were to respond quickly, which is more or less in the hands of OPEC+…and whether global refining responds with increasing runs.”
Despite the European energy supply crisis, “the market is not structurally short on oil supply, partly because OPEC+ is sitting on roughly 8 million bpd of spare crude production capacity,” he said.