OPEC+ sees limited impact from omicron as it discusses another oil production hike

OPEC and its Russia-led allies appear increasingly confident that the omicron variant will take a limited toll on global oil demand and narrowed their forecast of the market's oversupply to 1.4 million b/d for the first quarter -- less than half of the 3.0 million b/d surplus they estimated a month ago.

The forecast, reviewed by an advisory committee Jan. 3, a day ahead of the full OPEC+ meeting, lends support to suggestions from several delegates that the group may approve another 400,000 b/d hike in production quotas for February.

"No major evidence on omicron impact to demand," one delegate told S&P Global Platts on condition of anonymity. "So far, so good."

The 23-county alliance, which controls about half of the global oil production capacity, has been gradually restoring output in 400,000 b/d monthly increments, aiming to regain pre-pandemic levels by late 2022.

However, the rampant spread of the omicron variant and an expected seasonal drop-off in oil consumption in the coming months had several OPEC+ watchers speculating that the producer coalition could pause its increases or reduce their size.

The internal OPEC+ analysis, seen by Platts, projects an oversupply in every quarter of 2022 if the group maintains its monthly production hikes, even as it reiterates the expectation that "the impact of the new omicron variant is expected to be mild and short-lived, as the world becomes better equipped to manage COVID-19 and its related challenges."

The much tighter Q1 market balance is partially offset by wider gaps between supply and demand in Q2 and Q3 in the analysis, though the full-year surplus estimated at 1.4 million b/d is lower than last month's forecast of 1.7 million b/d, when the committee said it was still grappling to fully understand the trajectory of omicron.

The oversupply may be even smaller than that, with several OPEC+ members, notably Angola, Nigeria and Malaysia, already struggling to pump at their quotas, due to technical issues, maturing fields or internal instability.

That means any agreed 400,000 b/d increase is likely to be much smaller in reality, unless the countries with spare capacity -- primarily Saudi Arabia, the UAE, Russia and Kuwait -- make up for other members' shortfalls.

In addition, Libya, which is exempt from a quota under the accord due to its civil unrest, has begun maintenance on a ruptured pipeline that will shut in 200,000 b/d of production, state-owned National Oil Corp. announced Jan. 1.

Platts Analytics forecasts that sustainable OPEC+ spare capacity will fall to 2.15 million b/d in January, which could be exhausted by mid year if the quota increases continue.

OPEC Secretary General Mohammed Barkindo, in his opening remarks to the Joint Technical Committee meeting, said the group would "remain highly nimble and adaptable to the constantly changing situation."

OPEC+ market balances

Unit: million b/d

Source: OPEC+ document