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OPEC+ grows more bearish in its market outlook, with a deal on May quotas on the line

Highlights

OPEC sees oil fundamentals worsening ahead of meeting

Russia pushing again for quota increase, sources say

Tension flares over compliance and compensation cuts

London — With the recovery in global oil demand not expected to pick up pace until the second half of the year, key members of the OPEC+ producer group appear aligned on extending their current output quotas through at least May.

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But a formal agreement still needs to be hammered out, when ministers meet April 1, and a straightforward rollover is not assured.

Sources said Russia has asked for another small increase in its quota, lack of compliance by some members remains a sore spot, and the countries must also decide on the length of a deal, whether to set production levels for just one month or more.

As well, Saudi Arabia has its voluntary extra 1 million b/d cut that is set to expire at the end of April.

A key nine-country monitoring committee, co-chaired by Saudi Arabia and Russia, issued no formal recommendation after meeting March 31, but revealed that it now expects global oil demand to rise more slowly than previously expected.

"We need to remember that the environment remains challenging, complex and uncertain, with the market volatility we have witnessed in the last two weeks of March a reminder of the fragility facing economies and oil demand," OPEC Secretary General Mohammed Barkindo told the committee, citing the resurgence of COVID-19 cases in Europe, uneven vaccine rollouts and inflationary pressures.

"We should not be out smelling the flowers just yet," he added.

Russia wants more

OPEC+ members are currently obliged to withhold about 7 million b/d of crude production, with Saudi Arabia adding its extra 1 million b/d cut on top.

Under the terms of its pact, the alliance can adjust output caps by up to 500,000 b/d each month.

As it has in previous months, Russia has pushed again for a moderate increase, to accommodate what it says is rising domestic fuel consumption. But is encountering some resistance, sources involved in the talks told S&P Global Platts.

Mass vaccinations and lighter coronavirus restrictions have driven Russian gasoline and diesel demand beyond pre-pandemic levels already.

The OPEC+ alliance has granted Russia a series of quota rises to its current 9.379 million b/d, excluding condensate, through April.

At the same time, according to the OPEC+ deal's original timeline for increasing production, Russia's output was to be capped at 9.495 million b/d by June.

"As a result, Russia has just 115,000 b/d left out of the 500,000 b/d production quota softening set by the OPEC+ agreement back in December 2020," VTB Capital said.

But even increasing that amount could jeopardize the oil market's extremely fragile recovery from the pandemic, some members say.

The OPEC secretariat revealed it had revised its 2021 global oil demand forecast to 5.6 million b/d, down 5% from its forecast of 5.9 million b/d made three weeks ago. Most of the rebound is expected to occur in the second half of the year.

Producers from outside the organization, meanwhile, are expected to grow supply by 1 million b/d, compared to 700,000 b/d previously forecast, the secretariat said.

Global oil inventories remain 58 million barrels above the targeted 2015-2019 average, with most of February's draw in stocks comprising oil products, not crude, as the deep freeze in the US caused refineries to temporarily halt operations, according to the secretariat.

"We are seeing that the recovery from COVID-19 is far from smooth and assured," said Neil Atkinson, an independent analyst who until recently was the International Energy Agency's head of oil markets. "OPEC+ are absolutely right to tread carefully. They should micromanage their supply as data evolves."

Platts Analytics is forecasting 5.8 million b/d of demand growth and a 1.2 million b/d increase in non-OPEC supply in 2021.

Compliance complaints

The worsened outlook has Saudi Arabia, Algeria, Kuwait and other members generally in agreement on rolling over quotas, sources said.

Saudi Arabia's intentions with its extra cut also will loom large over the meeting.

Saudi energy minister Prince Abdulaziz bin Salman, who has generally favored a keeping a tight leash on production, has said the kingdom could keep its additional cut to help prop up prices if market conditions warrant and OPEC+ counterparts maintain their quota compliance.

But sore feelings over the so-called compensation cuts owned by quota violators resurfaced at the monitoring committee meeting, sources said, with compliant members expressing frustration at the free-riders. Ministers are expected to discuss the issue again when the full group convenes.

Cumulative overproduction since May now totals 3.027 million b/d as of the end of February, according to OPEC+ figures seen by Platts, up from 2.793 million b/d at the end of January.

Russia owes the most at 806,000 b/d, the figures show, though it has largely been given a pass for its non-compliance due to its status as the alliance's largest producer.

Iraq, whose prime minister arrived in Saudi Arabia on March 31 for a state visit, has the second most excess at 647,000 b/d but has so far only submitted plans to make 608,000 b/d in catch-up cuts.

South Sudan (508,000 b/d), Gabon (364,000) and Kazakhstan (361,000) are also major overproducers, according to the data.