Commodities 2021: OPEC+ alliance seeks less drama in 2021 but has monthly decisions to make

In turning the page on a turbulent and painful 2020, OPEC and its oil producing allies will likely have some pressing New Year's resolutions.

At the top of the list will be shepherding oil prices gradually higher to ease their budget pain, avoiding a supply squeeze that would upend the global economy, and reclaiming market share as oil demand hopefully returns.

The goals are not that much different from the previous four years of OPEC+ cooperation, except the ministers have also resolved to meet every month in an attempt to remain nimble in the face of the COVID-19 crisis.

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The pandemic has left the producer group, which made deep output cuts to rescue the market from this spring's crash, in a vulnerable state.

Brent crude prices are more than 20% below year-ago levels, draining member coffers, and oil consumption, particularly in the aviation sector, remains significantly impaired.

Coronavirus vaccines have buoyed hopes that the pandemic will be eventually contained, but their rollout will take months, leaving a rocky road ahead for the OPEC+ coalition.

First on tap is a Jan. 4 meeting, when ministers will decide on production quotas for February.

Testy, protracted talks a month earlier resulted in the group agreeing to raise quotas by 500,000 b/d for January –- a compromise between members, including Saudi Arabia, that wanted to maintain severe output cuts due to an uncertain pandemic recovery path, and others, such as Russia and the UAE, that sought to boost production to keep US shale companies and other competitors at bay.

Russian Deputy Prime Minister Alexander Novak on Dec. 25 floated the possibility of another 500,000 b/d increase for February, the maximum monthly amount allowed under the rules set by the alliance for the first half of 2021.

Algerian energy minister Abdelmadjid Attar, however, said days later that members should remain cautious, with the emerging new virus strains likely to weigh on global oil demand.

"Is the oil demand forecast for Q1 better than that forecasted in early December? I don't believe so, with the lockdown in many countries in Europe until the end of January," one delegate told S&P Global Platts, asking not to be named to speak freely. "It would be more reasonable not to increase production in February."

Another said that Novak's proposal is in play but could depend on whether countries that previously violated their quotas make serious commitments to implement so-called "compensation cuts" to offset their excess production.

As of the end of November, five OPEC members and six non-OPEC countries must make a combined 2.56 million b/d in cumulative catch-up cuts, led by Iraq, which owes 589,000 b/d, and South Sudan, which is 363,000 b/d in arrears, according to an internal OPEC+ document seen by Platts.

Raising quotas would make it easier for that compensation to be carried out, but members want assurances from quota busters that their freeloading ways are over.

Competing priorities

Many OPEC watchers, however, say that if prices rise as the global economy rebounds, discipline may well slide, given historical precedent.

"OPEC+ will find it increasingly difficult to walk the tightrope between volume and price, with the organization looking to both increase revenues and prevent a sizeable rebound in US market share," Platts Analytics said in a recent note. "It will only become more difficult for OPEC+ to maintain cohesion as inventories draw and prices move higher."

Tight-lipped so far on its intentions is OPEC kingpin Saudi Arabia, whose energy ministry did not respond to a request for comment.

Energy minister Prince Abdulaziz bin Salman strongly advocated for continued production restraint at the last OPEC+ meeting but was unable to sway his counterparts. OPEC+ delegates say they expect his position has not shifted.

The kingdom has slashed its budget to cope with lower oil revenues but still has urgent, ambitious economic development plans that require substantial spending.

Also factoring into the OPEC+ deliberations are outlooks for members Libya, Iran and Venezuela, which have been exempt from quotas.

Libya's crude production has surged to about 1.2 million b/d in recent days, according to some estimates, up from about 80,000 b/d in April. However, the ceasefire between warring groups that have allowed its oil wells to resume pumping is fragile.

Iran, meanwhile, is already anticipating a lifting of US sanctions after President-elect Joe Biden is inaugurated in January, though analysts say any significant comeback of Iranian crude to the market is unlikely until the second half of 2021 at the earliest.

Venezuela's situation is murkier, as it may also ease tensions with the US under Biden but has seen its oil industry deteriorate from years of corruption and economic hardship.

Talking the talk

A delegate-level OPEC+ advisory committee co-chaired by Saudi Arabia and Russia will meet Jan. 3, the day before the full OPEC+ meeting, to review market conditions and assess member compliance with quotas.

A ministerial monitoring committee, also co-chaired by Saudi Arabia and Russia, will convene just before the OPEC+ meeting on Jan 4, as well.

The alliance has endured a turbulent year -– including a brief break-up in April -– but Prince Abdulaziz and Novak said Dec. 19 after a meeting in Riyadh that they are committed to cooperating, despite the differences they have had in the past.

OPEC and its partners will be aiming for a much smoother 2021, and their first meeting of the year will set the tone.

COMPENSATION CUTS OWED

Unit: million b/d

Source: OPEC+ document seen by Platts