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After five days of difficult talks that exposed new divisions among the main members, OPEC + agreed to smooth production cuts next year. The deal seemed to satisfy the oil market and most of the cartel members, but it strained the group’s unity and set trial times ahead.
Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, the group’s de facto leader along with his Russian counterpart, was outspoken that the deal was hard-won.
“It is very unbearable, it is very exhausting,” Prince Abdulaziz told reporters after Thursday’s meeting. “If you want to work with 23 countries, you have to be very compatible with the idea of flexibility.”
Despite all his talk about fatigue, the prince had just signed up for an even more grueling schedule of meetings between the Organization of the Petroleum Exporting Countries and its allies, which will define the trajectory of crude prices in the coming months.
After a split emerged between Saudi Arabia and the United Arab Emirates, the cartel was unable to agree on what was widely expected before this week: a full three-month delay to the production increase scheduled for January. Instead, the ministers resolved to add 500,000 barrels a day of production to the market next month and then hold monthly meetings to decide on subsequent moves.
The deal could add a maximum of 2 million barrels per day to the market, but ministers could also decide to cut production again if necessary, said Russia’s Deputy Prime Minister Alexander Novak. The maximum change in any month will be 500,000 barrels per day in any direction.
After prolonged negotiations this week, it is not “the nightmare scenario that the market feared, but it is not what I really expected weeks ago,” said Rystad Energy AS senior analyst Paola Rodríguez-Masiu. “The fact that February production levels are still being debated creates more uncertainty for the next OPEC + meetings.”
Responding to uncertainty
The revised deal is not as conclusive as many OPEC observers expected, but it could be a rational response to the tremendous uncertainty in energy markets.
OPEC + has just emerged from a period of historic turbulence. It rescued the oil market earlier this year from an unprecedented slump, cutting production by 9.7 million barrels per day as the pandemic crushed demand.
The cartel returned 2 million barrels a day of that production to the market in August without a hitch, and was due to add a similar volume next month. However, several members of the group were concerned that the market was still too fragile to absorb those additional barrels.
While a breakthrough in vaccines to cope with the coronavirus caused oil prices to rebound, a resurgence in infections has triggered a new wave of lockdowns and dealt a new blow to fuel consumption. The cartel and the industry in general have downgraded their prospects for 2021, with a picture that is highly polarized between the recovery in Asia and the stagnation in Europe.
The January production surge, which is just a quarter of what would have occurred under the previous OPEC + deal, is likely to keep the oil market in deficit during the first quarter, according to Bloomberg calculations using data from OPEC. That means the inflated fuel inventories that weigh on prices will continue to decline.
“These 0.5 million barrels per day will be absorbed into the market very easily,” Amrita Sen, co-founder of consultancy Energy Aspects Ltd., said in an interview with Bloomberg TV on Friday. “This really ensures that the market will not be oversupplied in the first quarter.”
Brent crude rose 2.1% to $ 49.72 as of 8:07 am in London, a nine-month high.
Had the group gone ahead with the full increase in supply, the cartel economists had calculated that the market would have turned into a surplus, which could undermine the recent price spike.
“It is a wise decision,” Iran’s Oil Minister Bijan Namdar Zanganeh told the state-run Shana news service after the talks concluded. “These monthly meetings can help preserve market stability” and the additional supplies that will arrive in January will not have much of an impact, he said.
Difficult process
The flexibility offered by a monthly cycle of high-profile ministerial meetings may be desirable, but the process to get there appears to be less.
“There was a lot of drama at this meeting and tensions soared,” the Senator said.
The intensity of a fight earlier this week between Saudi Arabia and the United Arab Emirates took OPEC watchers by surprise. The pair have long been staunch allies, but Abu Dhabi is pursuing a more independent oil policy. You are investing heavily in new production capacity, you want to pump more oil, and you believe your current quota is unfair. He even pointed out last month that he was considering his options outside the club.
On Monday, differences between the two countries prevented the cartel from reaching a clear agreement, forcing them to delay the scheduled meeting with OPEC + allies by two days.
In an apparent gesture of frustration, the Saudi energy minister told the group that he could resign as co-chair. His counterpart from the United Arab Emirates, Suhail Al Mazrouei, was offered the position, but declined, according to a person familiar with the situation. In the end, OPEC + asked Prince Abdulaziz to stay.
In his closing remarks after Thursday’s meeting, the prince chose to highlight the episode. “Sometimes it’s very frustrating, and that’s why two or three days ago I threw in the towel,” he said. “But the towel comes back to me.”
Several analysts predicted more problems in 2021.
“Relations between Saudi Arabia and the United Arab Emirates continue to be watched,” said Ed Morse, Citigroup Inc. Global Head of Commodity Research. “The UAE is likely to be more independent and influential in the group’s affairs in the future. “.
