OPEC+ is weighing its supply options after the US-led attempt to lower prices by releasing stocks has been complicated by major a sell-off after resurgent COVID-pandemic fears. How it responds will set the tone for oil markets in 2022.
Holding back planned quota increases at its next meeting on Dec. 1-2 will make the producer group look mean and increasingly blamed for causing rampant global inflation that is now endangering the still fragile economic recovery.
Yet, some members are still calling for an aggressive response to the coordinated 70 million-barrel Strategic Petroleum Reserve release, which is equivalent to about two days-worth of OPEC+ output.
Such a strategy would risk inflaming already tense relations with the US, where crude trading previously over $80/b had been blamed for inflation surging to a 31-year-high of 6.2% and gasoline selling for over $4 a gallon in some parts of New York.
However, ignoring the US SPR release also carries risks. Since July, OPEC and its Russia-led allies have been raising crude quotas by 400,000 b/d each month, a gradual pace that has allowed them to support oil prices while largely keeping a US shale rally in check. Many forecasters and strategists now warn continuing to increase output will leave the market oversupplied come January, especially if the Northern Hemisphere winter brings more COVID-19 lockdowns.
Fears over new lockdowns due to the new COVID-19 variant of concern, omicron, already triggered crude prices to collapse on Nov. 26. S&P Global Platts assessed Dated Brent closed down 11% on the day at $73.27/b, the lowest in two months, after details of a new variant of the virus emerged.
The SPR drawdowns "will surely result in aftershocks as the fault lines between OPEC+ and major consuming countries become ever more visible," said Tamas Vargas, an analyst with brokerage PVM Associates.
Concerns are growing the OPEC+ strategy has led to an overtightened market, with Dated Brent briefly hitting three-year highs in late October above $86/b.
The price surge has been used by the Biden administration to justify its SPR action.
"Americans are facing high gas prices because oil producing countries and large companies have not ramped up the supply of oil quickly enough," Biden said.
But traders have been underwhelmed by the volume of crude released and the lack of detail on the exact timing of the discharge.
That much of the crude will eventually need to be replaced, making the transactions more of a swap than a sale, has also tempered the market reaction.
Nevertheless, these barrels add to an already thorny outlook for OPEC+ members as the calendar turns to a seasonal lull in demand and signals a worrying rift growing between the world's largest producers and the consumers of their crude.
S&P Global Platts Analytics forecasts that global oil demand will contract by a sharp 1.6 million b/d from the fourth quarter of 2021 to the first quarter of 2022, due to seasonal factors, the impact of higher prices and outbreaks of COVID-19 infections in some countries.
Such forecasts have many OPEC+ members worried about a renewed slump in prices that would undo the hard-won gains of the last several months and destabilize their economies just as they are regaining their footing.
Although "all options are on the table", sources tell Platts, OPEC+ ministers and delegates are split on how to respond.
Already, some US lawmakers have called for a revival of so-called "NOPEC" legislation that would expose the organization to antitrust litigation for market manipulation. The concept enjoys broad support, as memories of the OPEC oil embargoes of the 1970s endure, though presidents to date have been able to keep the legislation at bay, so as not to jeopardize bilateral relations with individual OPEC countries.
Biden, however, has so far shown no eagerness to court OPEC kingpin Saudi Arabia, whose giant Port Arthur refinery in Texas could be at risk from a NOPEC lawsuit.
Saudi Arabia and its Gulf allies might also be worried about the prospects of the US reengaging with regional rival Iran on stalled nuclear talks that could lead to sanctions relief and up to 1.5 million b/d of Iranian oil coming back to the market.
As for China, it has been cagey about how much crude it will release, with analysts speculating that up to 15 million barrels could be offered through its next state auction.
But facing its worst energy crisis in decades that has severely impacted manufacturing and led to diesel rationing, China has made supply security and price stability top priorities. OPEC+ countries will not want to jeopardize increasingly close relations with the world's biggest crude importer.
These geopolitical considerations are influencing the OPEC+ deliberations, according to people familiar with the discussions.
"Calculations don't seem to always follow market fundamentals," one OPEC+ source said on condition of anonymity.
If the Biden administration had held off using the SPR, current market tightness may well have proven transitory and price relief swiftly followed.
Instead of waiting the US and its partners have opened an aggressive front against the OPEC+ alliance, taking away its desired ability to manage global oil supply on its own terms.
The OPEC+ deliberations will begin with OPEC's 13 members convening Dec. 1, followed in the afternoon by a delegate-level technical advisory committee meeting. The Joint Ministerial Monitoring Committee co-chaired by Saudi Arabia and Russia will then meet Dec. 2, before the full OPEC+ coalition holds talks later that day.
What they decide will set the tone for the oil market for the year ahead.