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OPEC+ sticks with 400,000 b/d oil output hike for December, despite US pleas

Highlights

Rising prices have US, Japan, India complaining

Saudi Arabia says output quotas will be respected

Next OPEC+ meeting scheduled for Dec. 2

OPEC and its allies are standing firm on boosting crude output quotas by a modest 400,000 b/d for December, shrugging off intense lobbying from the US and other consuming countries for more volumes to bring surging oil prices down.

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With oil demand still under pressure from COVID-19 infections in many parts of the world and expected seasonal weakness as the calendar turns to 2022, OPEC+ ministers on Nov. 4 maintained their previously agreed plan, with Saudi energy minister Prince Abdulaziz bin Salman saying the group was "acting in a responsible way."

"We still believe what we are doing is the right job," he told reporters.

Under the OPEC+ deal forged in July, the alliance is gradually raising output targets by 400,000 b/d each month -- far too little for the US, whose officials had blamed the group for high gasoline prices. Key customers India and Japan also lodged complaints, saying an overheated market could derail their economic recovery from the pandemic.

S&P Global Platts assessed Dated Brent at $81.89/b on Nov. 4, a retreat from three-year highs of above $85/b in October, but still up 63% year to date.

But OPEC+ ministers for weeks had been signaling that they saw no reason to deviate from their agreement, viewing the global natural gas shortage as the reason for rising oil prices.

"We are expecting that, as usual in the first quarter, to have a surplus in the balance of supply and demand," UAE energy minister Suhail al-Mazrouei said. "The 400,000 b/d we are adopting as a resolution is going to take us smoothly to that position."

Eyes turn to US SPR

The decision may prompt the US to lead a coordinated release of stocks from strategic reserves, which US President Joe Biden has hinted at, though even he conceded any price impact would be marginal and that the gasoline market is likely to soften in the coming months anyway.

A US Department of Energy senior official declined to say whether the Biden administration was considering an SPR release or discussing one with other consumer nations.

"The most important thing we need to do is to try to convey to these other oil producers that they need to look at the impact they're having," the official said during a background briefing webcast from the UN Climate Change Conference.

"We think that what's needed right now is more common sense in the market," the DOE official added. "We didn't get that from the OPEC producers today. We're certainly going to be on the phone with them talking about that."

Armed with charts and graphs, Prince Abdulaziz told a post-meeting press conference that the rise in oil prices was relatively moderate when compared to the soaring gas market, which does not have an organization like OPEC to manage supply to moderate volatility.

He estimated that the gas supply crunch had led to an incremental oil demand boost of about 500,000 b/d from power plants switching fuels, which could max out at around 600,000 b/d.

OPEC+ members were closely matching production volumes to expected oil consumption, with supply even exceeding demand this month, Prince Abdulaziz said.

"We are a responsible regulator to a market that needs to be regulated," he said.

Shrinking capacity

However, the decision, reached in a relatively quick meeting, will put a spotlight on the alliance's shrinking spare production capacity, which is increasingly concentrated in Saudi Arabia, the UAE, Iraq, Kuwait and Russia.

Platts Analytics forecasts that sustainable OPEC+ spare capacity will fall to about 2.1 million b/d by January.

Several OPEC+ members, notably Angola, Nigeria and Malaysia, have been unable to pump at their quotas due to technical issues, maturing fields or internal instability.

That means the agreed 400,000 b/d increase is likely to be much smaller in reality, keeping the market tight, unless the countries with spare capacity make up for other members' shortfalls.

Platts estimated the 19 OPEC+ members with quotas underproduced their caps by a combined 570,000 b/d in September, for a compliance rate of 111.5%.

Prince Abdulaziz would not be drawn on whether his country or others would step in.

"Out of sheer respect of the distribution that we have agreed to, we have to keep to our allotments," he said. "The alternative is, we will have on a monthly basis a meeting of who gets what, which will really disturb the stability of this agreement and the transparency of this agreement."

Relief valves

The resumption of Iran nuclear deal talks, scheduled for Nov. 29, could provide some relief, if an elusive deal that lifts sanctions can be reached. Platts Analytics expects that Iranian crude supply could rise by some 1.4 million b/d with a deal.

As they have at every meeting, OPEC+ ministers said they would continue to convene monthly to monitor supply and demand fundamentals. The next meeting is scheduled for Dec. 2.

With the monthly 400,000 b/d production rises, the OPEC+ alliance intends to fully taper their historic 9.7 million b/d output cut implemented in spring 2020 by late 2022, though ministers said they will be flexible to account for changing market conditions.

"In my opinion, today's $80/b price reflects the current situation on the market. We'll see what will happen in December-January," said Russian Deputy Prime Minister Alexander Novak, who manages his country's OPEC+ portfolio.