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OPEC+ deliberates on January oil output targets as US lays on pressure

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OPEC+ deliberates on January oil output targets as US lays on pressure

Highlights

Ministers discuss pausing or keeping 400,000 b/d increase

Internal analysis sees surplus widening to 2 mil b/d in Jan

US has threatened more SPR releases if OPEC+ holds back

For months, OPEC and its Russia-led allies have stuck firm to a measured easing of production quotas, even amid a surge in oil prices and a chorus of complaints from the US and other key customers calling for more crude.

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Now, with winter set to flip the market into surplus and coronavirus concerns weighing on the global economy, OPEC+ ministers are assessing whether to pause the alliance's next scheduled increase of 400,000 b/d for January.

Spooked by the Black Friday oil sell-off and the emerging omicron variant of COVID-19, some countries are urging a pullback from the group's monthly output hikes, as ministers opened two days of meetings Dec. 1.

Others, however, remain focused on regaining market share, even at the risk of steepening the market's slump, and are wary of escalating a tit-for-tat with the US after the Biden administration announced a 50 million barrel release from its strategic reserves in the coming months.

China, India, Japan, South Korea and the UK are also planning to sell off some 20 million barrels or more from their national stockpiles, in coordination with the US.

"We need to remain united, focused and ready to adapt to any changing market dynamics," Angolan oil minister Diamantino Pedro Azevedo, who holds the rotating OPEC presidency, said in prepared remarks as the group opened its formal talks.

The 23-country OPEC+ coalition, which controls about half of global oil supply, has committed to gradually restoring production to pre-pandemic levels by late 2022 through monthly 400,000 b/d increases, though it has reserved the right to adjust its output quotas if needed. As of the end of December, the group will be 3.76 million b/d shy of its target.

Dated Brent has tumbled 16.5% since hitting a three-year highs above $86/b in late October, with S&P Global Platts assessing the crude benchmark at $71.95/b on Dec. 1.

Internal OPEC analysis presented to ministers and delegates indicates global oil demand will grow 4.15 million b/d in 2022, returning to levels not seen since early 2020 before the full blow of the coronavirus pandemic hit, according to a document seen by Platts.

But it also forecasts that the SPR barrels and a continuation of the OPEC+ alliance's monthly production increases will create a significant market oversupply of about 2 million b/d in January, growing to 3.4 million b/d in February and 3.8 million b/d in March.

The surplus will remain throughout all of 2022, though it will tighten in the second and third quarters as seasonal demand picks up and some of the SPR volumes are bought back to replenish the reserves, the analysis showed.

OPEC cautioned that the outlook was subject to significant variables, given the uncertain trajectory of the virus.

"Transmissibility and severity of omicron is not yet clear," the internal report said. "More data will be available in two weeks."

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Price considerations

OPEC ministers kicked off the proceedings with a virtual meeting, though delegates said the agenda was focused mostly on internal housekeeping matters, such as approval of the budget and a discussion over its next secretary general, with Mohammed Barkindo's term set to expire at the end of July.

An advisory delegate-level OPEC+ technical committee then met to review the market forecasts.

The nine-country OPEC+ Joint Ministerial Monitoring Committee, co-chaired by Saudi Arabia and Russia, will then convene online Dec. 2, ahead of the full OPEC+ talks scheduled for later in the afternoon.

US officials, which have heavily pressured the OPEC+ alliance to be more generous with crude supply, have continued their lobbying, with retail gasoline prices yet to experience the same decline as crude benchmarks.

The Biden administration, fighting a headwind of declining approval ratings fueled by record inflation, has said that further SPR releases could be on the table -- warnings that have not escaped the attention of OPEC+ ministers.

"Odds are rising that pressure from the US could facilitate another 400,000 b/d monthly quota increase for January," Platts Analytics said in a note on the OPEC+ deliberations, adding that Russia and Iraq have also downplayed the recent market volatility in a sign that they want to press on with hiking output.

Negotiations on the Iran nuclear deal being held just down the street from the OPEC secretariat in Vienna also bear watching.

While most observers were not expecting a major breakthrough in the talks between the US, European powers and Iran, any hint of a détente would represent progress towards eventual sanctions relief that could bring up to 1.5 million b/d of Iranian oil back on to the market.

That would represent another major challenge for OPEC+ as it seeks to strengthen its grip on the oil market.