OPEC and its Russia-led partners have approved another hike in production quotas, betting that the market can absorb more oil in the coming months despite surging COVID-19 infections worldwide.
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In affirming a 400,000 b/d output increase for February on Jan. 4, the OPEC+ alliance signaled continued confidence that the omicron variant will have a smaller impact on global oil demand than previously assumed, and indeed, crude prices have so far proved resilient, hovering around $80/b.
Many economic indicators have remained positive, while global oil inventories have continued to decline as demand has outpaced supply over the past several months.
But even before the rapid spread of omicron cases, many forecasters – including OPEC's own analysts, had projected an oil oversupply throughout 2022, with weaker seasonal demand leading to a significant surplus in the first quarter.
That, along with the thousands of flight cancelations and business slowdowns triggered by omicron, has led to some speculation that the OPEC+ alliance will need to pause or reduce its scheduled output increases to prevent prices from backsliding.
That, however, appears to be a problem for another day, with delegates saying they saw no reason to change course under current market conditions. In fact, internal OPEC+ analysis reviewed by an advisory technical committee ahead of the decision indicated that the expected Q1 surplus would be 1.4 million b/d -- much narrower than the group had forecast before its previous meeting in December.
Ministers will next convene Feb. 2 to decide on March production levels.
"We are working on the assumption that there are uncertainties associated with the spread of the omicron strain," Russian Deputy Prime Minister Alexander Novak, who handles the country's OPEC+ affairs, told the Russia 24 television network after the meeting. "Nevertheless, observation and analysis shows that, despite the large increase in infections, the hospitalization rate is quite low, and is not affecting a decline in demand. Therefore, we believe that it is necessary to continue to fulfill those obligations that OPEC+ set within the framework of increasing production."
Spare capacity concerns
The 23-county alliance, which controls about half of global oil production capacity and instituted a record 9.7 million b/d cut during the market crash of spring 2020, has been gradually restoring output in 400,000 b/d monthly increments, aiming to regain pre-pandemic levels by late 2022.
After February, the group will have just under 3 million b/d of cuts left to unwind.
In reality, however, struggles by many members to hit their own quotas will make the actual production increase likely less than the agreed amount, unless the countries with spare capacity – primarily Saudi Arabia, the UAE, Russia and Kuwait -- make up for other members' shortfalls.
And Libya, which is exempt from a quota under the OPEC+ agreement, is expected to see production fall to a 14-month low this week, due to internal unrest and field maintenance, which will tighten market balances.
The 19 OPEC+ members with quotas pumped about 510,000 b/d below their collective targets in November, according to the latest S&P Global Platts survey of the group's production.
Absent a revived nuclear deal that could bring back Iranian barrels to the market, 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.
Unit: million b/d
Source: S&P Global Platts, OPEC+
Note: Mexico remains in the alliance but exited the deal in June 2020