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Fuel for Thought: OPEC+ to set tone for 2022 with response to US oil release, COVID-19 variant

FEATURE: Cautious OPEC+ deliberates output levels, as US, China seek more oil on the market

Highlights

Ministers will meet Oct. 4 to determine November quotas

Committee report says oversupply could develop in December

US wants gasoline price relief, China stocking up on energy

In the month since OPEC and its allies last met, oil prices have hit three-year highs, flirting with $80/b and bringing renewed pressure from the White House to tame the rally.

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The OPEC+ alliance is already scheduled to raise output by 400,000 b/d each month, but with China reportedly in search of more supplies and US production still hobbled, ministers may have ample reason to consider pumping beyond those limits, when they convene Oct. 4.

But they may also have plenty of motivation to stick to their plans, given the uncertainty that still surrounds the trajectory of the coronavirus pandemic.

Internal forecasts reviewed by the alliance's advisory Joint Technical Committee on Sept. 29 show global oil demand growth of only 700,000 b/d between September and December, which would seem to support a cautious approach.

Demand would continue to outpace supply by 1.2 million b/d in October and 900,000 b/d in November, before the market then flips into a 100,000 b/d surplus in December, if the OPEC+ alliance was to maintain its prescribed monthly output increases, according to the analysis seen by S&P Global Platts.

"There are great short-term economic uncertainties, with the slowdown in activity and the very high level of private debt in China," said one delegate who opposes raising output too quickly and spoke on condition of anonymity.

He added that if the US begins tapering its monetary stimulus more quickly than expected, major emerging economies that drive oil demand growth could be weakened.

US pressure, Chinese demand

But the JTC also discussed how skyrocketing global natural gas prices are spilling over into the oil market, with some power plants switching feedstock to fuel oil, according to delegates.

And for all that the alliance tries to keep politics out of its deliberations, market fundamentals are often not the sole factor in production decisions.

In the US, a key ally of several core OPEC countries such as Saudi Arabia, rising gasoline prices have prompted much handwringing, with White House press secretary Jen Psaki saying Sept. 28 that the Biden administration was engaging with the producer bloc on how to cool off the market.

In July, the administration had publicly admonished OPEC and its allies for not being more aggressive with their production hikes, as the summer driving season spurred more oil demand.

US regular gasoline retail prices averaged $3.16/gal in August, the highest monthly average since October 2014, according to the US Energy Information Administration.

Meanwhile, some 600,000 b/d of US crude production in the Gulf of Mexico was offline in September in the wake of Hurricane Ida, S&P Global Platts Analytics estimates.

The OPEC+ analysis reviewed by the JTC acknowledged the hurricane's impact on supplies, noting that "more than 30 million barrels have been cumulatively shut-in so far, and it is estimated that the full recovery will be longer than expected, due to oil leakages."

China, a key oil customer for many OPEC+ members, will also be top of mind when ministers meet.

State media have reported that Chinese officials have directed domestic energy companies to secure fuel supplies for the coming months, with the country facing severe shortages that have curtailed economic activity.

Whether that translates into increased oil imports remains to be seen, as the government recently also ordered releases from its strategic petroleum reserves in a bid to ease rising prices.

Spare capacity concerns

OPEC+ ministers have often stressed that in meeting monthly to determine production levels, they can stay on top of quickly shifting economic forces, as the world continues to grapple with COVID-19.

The nine-country Joint Ministerial Monitoring Committee co-chaired by Saudi Arabia and Russia will convene first on Oct. 4 to assess the market and issue policy recommendations to the full 23-country coalition, which will meet immediately afterwards to make final decisions.

"OPEC+ has demonstrated a clear reluctance to oversupply a fragile demand recovery, and monthly meetings provide flexibility to add production quickly should the market require," Platts Analytics said in a note.

Even if the group decides to accelerate its production increases, how to equitably apportion those additional volumes may complicate the talks.

Already, many members are facing practical limits on how much they are able to pump, due to declining mature fields, internal disruptions, or a lack of investment, exacerbated by the oil market crash. Angola, Nigeria and Malaysia are among those that have struggled to produce at their current allocations.

S&P Global Platts Analytics estimates that as of September, Saudi Arabia, the UAE, Russia, Kuwait and Iraq held 95% of the world's 4.6 million b/d of spare production capacity, giving them more leverage as OPEC+ quotas continue to rise.

Whether this meeting or the next few, the OPEC+ alliance will need to confront the growing inequities between its members.

Market balances forecast by OPEC+

Sep 21
Oct 21
Nov 21
Dec 21
Jan 22
Feb 22
Mar 22
Apr 22
May 22
Jun 22
Jul 22
Aug 22
Sep 22
Oct 22
Nov 22
Dec 22
World demand
98.7
99.8
99.9
99.4
98.6
97.6
97.8
99.4
100.3
100.7
101.7
102.5
102.7
102.9
103.0
102.5
World supply
97.6
98.5
99.0
99.5
100.0
100.4
101.0
101.4
101.6
101.7
102.3
102.7
103.0
103.5
104.3
104.4
Balance
-1.1
-1.2
-0.9
+0.1
+1.4
+2.8
+3.2
+1.9
+1.3
+1.0
+0.5
+0.2
+0.3
+0.6
+1.2
+1.9

Source: OPEC+ Joint Technical Committee

Unit: million b/d

Note: Supply forecast assumes OPEC+ raises production by 400,000 b/d as currently planned, while exempt members Iran, Libya and Venezuela hold output flat from August 2021 levels