EVEN as the battle against COVID-19 continues, OPEC+ faces another uncertainty — heightened supply security risks in its member countries Libya, Nigeria and Iraq and no sign of an Iran nuclear deal.
Add to that the shutdown of nearly 1.75 million b/d of crude oil production in the US Gulf of Mexico due to Hurricane Ida, and one can imagine the group flitting between reports on weather, geopolitics and demand-supply dynamics when it meets on September 1 to decide output policy.
The 22-country OPEC+ alliance, which collectively controls about half of global crude production, has broadly agreed to gradually roll back the historic production cuts it instituted last spring. According to its plan, the group will add 400,000 b/d starting August through the end of 2022. But, unable to settle on a long-term plan, the bloc has taken to setting monthly quotas, which officials have said will allow it to be flexible in rapidly changing market conditions.
And flexibility will indeed be tested on September 1 as besides supply risks, the group also grapples with demand uncertainty as the pandemic continues to ravage economies. The group is also under pressure by the US with the Biden administration on August 11 urging it to pump more oil, criticizing the latest supply pact as “simply not enough” and accusing the producer bloc of endangering the global economy.
The US oil supply outage pushed the price of light, sweet Brent crude, an international benchmark, close to $73/b on August 30 after starting the month on a decline and sinking to a four-month low of $66.17/b on August 19.
Supply security risks are back in focus as spare oil supply capacity levels are set to decline.
According to S&P Global Platts Analytics, OPEC+ spare capacity is expected to fall from 5.4 million b/d in July to 3.3 million b/d by December.
“Of this, 95% will be held by Core OPEC+ countries — Saudi Arabia, Russia, UAE, and Kuwait — up from 84% in July. By the end of 2021, half of the world’s readily available production capacity will reside in Saudi Arabia alone, further increasing its leverage,” it said in a note August 12.
Platts Analytics expects Nigeria to be one of the largest risks for OPEC+ production growth in end-2021 and has warned supply threats by militants could resurface as violence is rising in the southeast of the country. Meanwhile, uncertainty over an Iranian nuclear deal creates a real possibility that 1.5 million b/d of expected Iranian growth through August 2022 will not hit the market.
“No Iran deal, strong militant action in Nigeria and a large Libya disruption, while not our base case, could be a bullish perfect storm for oil markets,” it said in a note August 17.
OPEC itself sees the market as tight and in its monthly report released August 12 warned that oil demand will likely remain higher than supply over the coming months, which could maintain upward pressure on near-term prices.
Platts Analytics has moderated its demand growth forecast for 2021 to 5.4 million b/d from 5.7 million b/d with a reduction in its third-quarter growth estimate, citing the coronavirus spike and mobility restrictions in parts of Asia and Africa. Its assessment is that demand grew by 1.4 million b/d in July, after growing by 2.4 million b/d month on month in June. Further growth is expected in August, before a moderation in September due to lower autumn seasonal demand and the refinery maintenance period.
Asian demand growth meanwhile remains patchy, but a slowdown in COVID-19 cases in China has offered hope that the world’s largest crude importer will see a demand recovery similar to that of India, the world’s third-largest importer.
Indian energy demand has steadily increased since mid-May as the country eased curbs on vehicular movements enforced during an April COVID-19 surge. Mobility in India in the first week of August improved by 3 percentage points to hit a fresh post-pandemic high of 13% below pre-COVID levels, mobility data reported by Google showed.
However, oil demand recovery in many other Asian countries faces headwinds amid the resurgence of COVID-19 cases and renewed restrictions, particularly in Indonesia, Malaysia, Thailand, Vietnam, Myanmar, South Korea and Japan.
In South Korea, mobility continued to dip into negative territory over the week to Aug. 8, after hitting 6% above pre-pandemic levels in June.
Refiners across northeast and southeast Asia are limiting crude buying as they grapple with high oil inventories. Crude stocks in South Korea are at their highest level in almost a year, while gasoline stocks in Indonesia – the region’s largest gasoline importer – are at seven-month highs.
In an August 27 note, Platts Analytics said its reference case “assumes that market conditions will provide sufficient confidence [for OPEC+] to continue increasing quotas, but history indicates OPEC+ will act cautiously in the face of demand uncertainty.”
Mriganka Jaipuriyar is head of news, Asia at S&P Global Platts