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

OPEC+ plan to boost output not enough to meet demand, build inventories: Vitol's Muller

Highlights

OPEC+ plans monthly 400,000 b/d boost

Alliance seen in control of oil prices this winter

Iranian, US crude output seen unlikely to grow significantly

The plan by OPEC+ to boost crude oil production by 400,000 b/d each month until December won't be enough to cater to rising global oil demand and help build inventories, particularly in Asia, where more supply will be needed in the fourth quarter, the head of Vitol Asia said Oct. 3.

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"This tale end of Q4 is typically the period of the year when Asia starts to pull on inventories pretty hard, demand is high and it becomes increasingly a function of how cold the weather is," Mike Muller told a webinar organized by Dubai-based Gulf Intelligence.

"But the underlying fact remains as it has been for months that demand is causing a disappearance in inventories a lot faster than the 400,000 b/d that OPEC is proposing to put on the market. At the very time OPEC has it in their hands to take global inventories down to or below pre pandemic levels, the world wants more inventory."

OPEC+ ministers are set to meet virtually Oct. 4, when they will discuss the tapering of production and November quotas.

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 at the meeting.

OPEC+ control

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 is to maintain its prescribed monthly output increases, according to the analysis seen by S&P Global Platts.

OPEC+ ministers will meet after oil prices hit three-year highs, nearly touching $80/b, and the US called on the group to boost production.

Control of oil prices will be in the hands of OPEC+ in the fourth quarter, according to Muller.

"It is going to be an awfully delicate balance to make judgments on whether the higher prices will begin to impact demand or whether they (OPEC+) need to heed the signals coming from substitution, switching into oil fuels," Muller said. "I think for this particular winter, control over prices is very much in hands of OPEC+."

OPEC+ is raising its output while the US is struggling to return to pre-pandemic levels.

The US pumped 11.307 million b/d of crude and condensate in July, according a Petroleum Supply Monthly release by the US Energy Information Administration on Oct. 1. Similar to June, US drilling activity stalled once again in July as operators added only four horizontal oil rigs.

US production

"As far as the rig counts in the Permian are concerned, yes it is going up but it is going up in a slow pace and it will not make a material dent in production in the coming weeks or months," Muller said.

Platts Analytics estimates US production was 11.329 million b/d in July, 22,000 b/d above EIA reported production. August and September experienced declines due to Hurricane Ida's impact on Gulf of Mexico's crude oil production, bringing down the US total to 11.1 million b/d and 10.66 million b/d respectively, according to Platts Analytics, which is still calling for modest growth in the fourth quarter as more rigs and frack crews are added to the major oil basins. Platts Analytics expects 2021 US production to average 11.09 million b/d, exiting the year at around 11.5 million b/d.

Besides the lackluster US oil production forecast, Muller does not expect OPEC member Iran to show a significant uptick in its supply to countries such as China, despite the possibility of renewed negotiations between Tehran and other countries which are signatories to the 2015 nuclear pact. Iran is currently exempt from OPEC quotas and is under US sanctions re-imposed in 2018.

"There will be no incremental Iranian oil over and above what is already going to markets where there is established flow such as China plus a bit of leakage of other products," Muller said. "There is a possibility that may go up a little."