OPEC and its Russia-led allies will plow ahead with a production increase for January, despite their own predictions of a looming oil surplus, choosing for now to avoid a potentially politically thorny decision on reining in output.
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Absent clearer data on the impact of the omicron COVID-19 variant, the OPEC+ alliance agreed Dec. 2 to raise quotas by 400,000 b/d, as prescribed, shrugging off market jitters over the emerging omicron COVID-19 variant, along with a US-coordinated strategic petroleum reserve release.
But in a nod to fast-changing conditions, the producer group stood ready to reconvene "pending further developments of the pandemic, and [to] continue to monitor the market closely and make immediate adjustments if required," the group's communique stated.
Officially, ministers "remain in session," according to the statement, though the next meeting to decide on February output levels was scheduled for Jan. 4.
The 23 OPEC+ countries, who control about half of global oil supply, have 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 targets if needed.
Delegates said the alliance debated pausing its next production rise, as well as evaluating options for a smaller increase.
But continued pressure from the US for more crude, along with a desire by some OPEC+ members to continue clawing back market share lost to the pandemic, apparently won out.
"Currently there are no objective indicators for us to change previously agreed decisions," Russian Deputy Prime Minister Alexander Novak told state broadcaster Rossiya24 after the meeting, adding that the group saw the market as balanced at the moment.
US thumbs up
Still, the January output hike could pile on to what the OPEC+ alliance already expects will be a significant oversupply in early 2022, between a forecasted sharp winter downturn in oil demand, the SPR releases that could total 70 million barrels or more, and the travel bans and renewed coronavirus containment measures in response to the omicron variant.
Internal OPEC analysis presented to ministers and delegates forecast that the SPR draws 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 decision initially sent crude futures, which were hovering above $70/b as the meeting kicked off, lower by about $5/b, after heightened trader anticipation of a production freeze, though they quickly recovered. In the physical market, Dated Brent ended down 1.7% to $70.71/b on Dec. 2, having fallen 18% since hitting a three-year high of $86.11/b on Oct. 25.
At the very least, the production hike will take some political heat off from the US, which had heavily lobbied the OPEC+ alliance to pump more crude to keep oil prices down and threatened further SPR releases.
"We appreciate the close coordination over the recent weeks with our partners Saudi Arabia, UAE and other OPEC+ producers to help address price pressures," White House Press Secretary Jen Psaki told reporters. "We welcome the decision today to continue the 400,000 b/d increase. Together with our recent coordinated release from the SPR, we believe this should help facilitate the global economic recovery."
She added that there were no plans to reconsider the SPR sales, though S&P Global Platts Analytics said the Biden administration could "hold off should market conditions or political realities warrant," adding upside for oil prices.
Compensation cuts and shortfalls
"OPEC+ is increasing supply into a seasonally weak Q1 [but] the quota hike could indicate confidence that recent price weakness will prove temporary, and the new coronavirus variant will not derail the demand recovery," Platts Analytics analysts Paul Sheldon and Sergio Baron said in a note. "In any case, monthly meetings and OPEC+ history since May 2020 both indicate a flexibility to quickly adjust to fundamental market changes."
OPEC+ delegates said the output hike will be partially offset by so-called compensation cuts owed by members that had exceeded their quotas in previous months. Countries will have until June to implement those extra cuts to make good on their overproduction.
According to OPEC+ records seen by S&P Global Platts, four OPEC members have accumulated 1.415 million b/d of excess output as of the end of October, led by Iraq with 783,000 b/d. Six non-OPEC countries have 2.846 million b/d of compensation due, more than half of it from Russia at 1.586 million b/d.
Analysts say Russia is nearing its full production capacity and doubt the country's ability to significantly raise output. Other countries, such as Angola, Nigeria and Malaysia, have struggled to reach their output targets over the past several months.
As a whole, OPEC+ achieved 116% compliance with its quotas in October, with a 719,000 b/d shortfall of its collective production ceiling, according to the group's calculations.
The alliance may be counting on the underperformance of many of its members and the enforcement of compensation cuts against its less disciplined countries to temper the scheduled quota rises in a tough market ahead.