It’s that time of the month again and all eyes are on the OPEC+ meetings.
Here is an initial comment on today’s OPEC+ technical committee meeting by our Head of Oil Markets Bjornar Tonhaugen:
Today’s OPEC+ meeting is the starter, with the main dish served on Monday when the ministerial meeting takes place.
The meeting is nevertheless important as it assesses market conditions and prepares the ground with recommendations for Monday.
The JTC is expected to conclude that OPEC+ compliance is still close to 100%, but perhaps slipping marginally vs. August and September.
Furthermore, we anticipate conclusions to be that oil market conditions have weakened in the very short term, with the global oil demand outlook at risk of further downwards revisions due to the stubborn rise in Covid-cases which has spurred select European countries to reintroduce restrictions in the recent days with possibly more to come.
Refining margins are still weak but on an improving trend. However, it’s apparent to us that Saudi Arabia is getting impatient, both with the lack of compliance by others and “low” oil prices.
Complicating matters further are rising flows from cut-exempt Libya and Iran. We have revised down our rising base case OPEC+ crude production forecast since our previous report by around 500,000 bpd for 4Q20 and 2021, led by Russia where we now expect tighter compliance, while Libya will recover more slowly than previously included in the base case based on operator guidance.
However, doubts are growing in the market whether OPEC+ will be able to follow its schedule for tapering the cuts by another 2 million bpd come Jan-21, owing to weak market conditions (and growing impatience with prices and rebalancing).
Members have said that they will not let prices collapse again and that in itself is a hint that all options are on the table to discuss, should the need arises.
Like in every good drama, there is a hot potato to handle. And in this occasion it’s compensatory oil production cuts for some of the members’ undercompliance.
Initial reporting from the meeting shows that the alliance has made up very little to compensate for its laggards’ owed cuts, with the ‘debt’ little changed since August.
It is a topic that makes everyone in the alliance uncomfortable and frustrated. For some of its members oil production income is vital and cuts are painful down to the barrel.
For richer nations it is a matter of confidence and of reliability. The alliance is formed from producers that are not on the same financial level, yet that are called to face the common enemy, Covid-19.
It remains to be seen how the alliance will deal with undercompliance and what measures it will take to force laggards compensate. Will it stay in strong words or could it move to more radical options that could threaten its cohesion? This answer will not likely be given today, but on Monday, yet the technical committee is definitely a taster of what is to follow.