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OPEC+ calm ahead of committee meeting as oil prices rise, but tough decisions loom

Highlights

Co-chairs Saudi Arabia, Russia to convene JMMC Feb. 3

Current production quotas set through end of March

Saudi cut lifts prices, but many in OPEC+ eager to pump more

London — OPEC+ ministers will convene Feb. 3 for a monitoring committee meeting that could provide the first signs of whether festering divisions will re-emerge when the alliance must decide how much crude oil to pump after the first quarter.

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With production quotas set through March and oil prices rising to pre-crash levels on the back of Saudi Arabia's surprise extra output cut, delegates say they expect relatively peaceful talks on the committee's usual agenda items of quota compliance and oil market forecasts.

A routine discussion would be a welcome respite after the past few months' meetings saw acrimonious cracks emerge among countries that want to pump more crude as oil demand has perked up, such as Russia and the UAE, and others that have urged restraint in the face of a still uncertain pandemic trajectory, including Saudi Arabia.

Even with no changes to the deal expected to be announced at the Joint Ministerial Monitoring Committee meeting, market watchers will surely be parsing minister statements to see how committed OPEC+ members are to the current quotas.

More difficult talks could follow at the coalition's next full meeting on March 4.

"Despite the uncertainties about oil demand growth and the rebound expected of economic growth, the oil market is relatively stable," one delegate told S&P Global Platts on condition of anonymity. "We will have more visibility in the coming weeks on market conditions, on the evolution of the pandemic and on vaccinations to make the right decisions to guarantee market stability. There is no reason to rush."

Saudi surprise

The 22-country OPEC+ alliance, which collectively controls about half of global crude production, has broadly agreed to gradually roll back the historic production cuts it instituted last spring. But, unable to settle on a long-term plan, the bloc has taken to setting monthly quotas, straining ties between members with divergent views on the market.

Uneven vaccine rollouts, the spread of new COVID-19 strains and tightened lockdown measures imposed in some countries have clouded the outlook, and any sanctions relief for Iran under the US' new Biden administration could also complicate OPEC+ efforts to thread the needle between supporting the market and protecting members' market share.

Russia and Saudi Arabia co-chair the JMMC, the alliance's key advisory committee, and their tug-of-war has defined the group's recent struggles to achieve cohesion.

Russia, with its more diversified economy and floating exchange rate making it more comfortable with lower prices, is keen to keep a lid on US oil production by pumping more, while Saudi Arabia, the biggest price hawk in the alliance, faces fiscal pressures as it invests heavily to diversify its economy.

The current OPEC+ pact, forged after two days of intense negotiations in early January, has the alliance committed to 7.2 million b/d of collective production cuts, with Russia and Kazakhstan given special dispensation to slightly increase their quotas in February and March, while all other members hold their output steady.

Saudi Arabia surprised the market and its OPEC+ counterparts by announcing it would unilaterally take on a 1 million b/d extra cut through March to prevent prices from backsliding.

Compliance in focus

The Saudi bombshell has juiced the market, with front-month Brent hitting $57.68/b as of 1128 GMT, its highest price in almost a year, before the bottom fell out as the pandemic ravaged the global economy.

Conventional wisdom and historic precedent say the rise in prices may erode OPEC+ production discipline. Compliance among the 10 OPEC members and nine non-OPEC countries with quotas under the deal slipped to 99% in December from 101% in November, according to several delegates who have reviewed the data that the committee will discuss..

One delegate said that the usual compliance laggards of Iraq, Kazakhstan and Russia were guilty of overproduction in December.

The monitoring committee is likely to stress the importance of fulfilling cut commitments, including so-called "compensation cuts" owed by several members, notably the three mentioned by the delegate, for previous quota violations.

With key members OPEC+ alliance already not seeing eye to eye on acceptable production levels, lax discipline will make future talks on quotas tougher.

The group will keep a wary eye on US shale's revival, and it will also have to grapple with how to accommodate the potential return of Iranian barrels, if the US and Iran are able to forge a deal on sanctions relief in the coming months.

"Given Saudi willingness to do most heavy lifting, we expect OPEC+ cohesion to persist for months, but the return of Iranian oil will present a test," Platts Analytics said in a recent note.

The monitoring committee meeting could provide the first preview of those challenging conversations, with some critical decisions ahead.