OPEC + Voices send a dip in oil prices

Although there was a lot of uncertainty about the OPEC + meeting, this title (from Bloomberg) was not one of them …

* SAUDI ARABIA MULLS RESOLVES FROM ROLE OF CO-PRESIDENT OF OPEC + JMMC Crude oil price reaction was instant selling, pushing WTI back below $ 45 …

Although the title is unclear, it strongly suggests that the discord within OPEC + is much greater than previously believed; and the fact that it is only these relationships that sustain the entire energy complex in the face of demand slumps that induce a block is worrying.

The move is likely simply a negotiating ploy to get the UAE to agree to extend the production cuts (which will require a price drop first to apply that pressure).

OVERVIEW:

OPEC and OPEC + producers meet on November 30 and December 1, respectively, to discuss and draft a potential adjustment to the current Declaration of Cooperation (DoC), launched in the light of the pandemic to recalibrate the imbalance between supply and demand. The meeting on Monday is scheduled for 13:00 GMT, subject to delays. The current DoC is divided into three phases:

1. Total production reduction of 9.7 million BPD between May and July 2020.
2. 7.7 million BPD of reduction in total production between July and December 2020.
3. Total production reduction of 5.7 million BPD between January 2021 and April 2022 (subject to revision in December 2021).

Market expectations are still oriented towards the extension of the second tranche (7.7 million BPD cuts) until the first quarter of 2021, a view also supported by Goldman Sachs, ING and UBS, despite the positive vaccine developments and the production on the rise in Libya. Recent sources have also noted that OPEC + is still leaning towards renewal of the current tranche despite the recent oil price hike, although some sources suggest 2-3 months and some up to the first quarter while more recent sources suggest 3-4 months – even with Russia they are likely to agree to the full quarter if needed. However, enthusiasm for the cuts isn’t universal – with some OPEC + officials cited by EnergyIntel for not being on board with the full “plan” on Sunday. Russia is also said to insist on gradual monthly increases in production since January, sources say.

SUNDAY JMMC MEETING

The informal consultation between Russian, Saudi and JMMC leaders was postponed to Sunday before the decision-making meeting. OPEC + panel of ministers failed to reach agreement on extending the current cuts, with most attendees reportedly supporting a delay in the hikes until the first quarter of 2021, but UAE and Kazakhstan they oppose. Sources cited by Tass said Russia and Saudi Arabia reached a consensus on extending the current level of cuts to the early months of the next few years, but the two producers still had to “coordinate” some details and the “extension” mechanism. . Meanwhile, sources quoted Sunday via Argus Media said that “A rollover would most likely be for a quarter … This would avoid flooding the market in January-March, a period of typically slower demand.”

NOVEMBER JMMC FALLOUT

The Joint Ministerial Monitoring Committee (JMMC) statement on November 17 did not provide details on its recommendations, but said it will be delivered on December 1. The Committee reiterated the “fundamental importance of adhering to full compliance and compensating for excess volumes, in order to achieve the goal of market rebalancing and avoid undue delays in the process”. There have also been rumors that OPEC + is pondering deeper production cuts, though it was rejected on Sunday by delegates who suggested not talking about collective deeper cuts.

COMPLIANCE OF CONFORMITY

Compliance among producers remains an issue as the latest October data from the JMMC suggests below average compliance, particularly from the UAE, Nigeria, Iraq, Gabon, Equatorial Guinea, Angola and Azerbaijan for a total cumulative overproduction of the group of 2,346 million BPD (see Figure 1).

Some sources have suggested that OPEC + compliance may still be an issue, however, EnergyIntel’s Bakr noted that “The expectation among delegates is that” the ‘cut recovery’ plan will be extended in 2021 to allow for some number of states to reach their quotas “

Related: OPEC + predicts an oil market deficit for next year

The desks did not expect these compliance difficulties to represent a short-term risk, given the “alert and proactive” position reported by OPEC + in recent meetings, with the group likely to reaffirm its position on full compliance and specifications they could be resolved in the future months with additional compensation fees.

TREND IN THE DEMAND AND THE PRICE OF OIL

Vaccine updates received positively by Pfizer / BioNTech (PFE / BNTX), Moderna (MRNA), AstraZeneca (AZN / Oxford) and the Russian Direct Investment Fund (RDIF) have provided brighter (or less dire) prospects for the complex due to the prospect of a recovery in activity and demand for jet fuel. However, the re-emerging cases of COVID-19 and the uncertain timing for mass rollout of approved vaccines continue to cloud the near-term prospects. Analysts at Goldman Sachs indicate that this reinforces the argument in favor of an extension of the current cuts. Furthermore, the IEA’s November OMR also suggested “it is too early to know how and when vaccines will allow normal life to resume. For now, our forecasts do not predict a significant impact in the first half of 2021. “However, this month’s vaccine fanfare provided a boost to the crude oil market, resulting in the Brent curve turning back ( theoretically a short-term bullish signal) – Figure 2 below indicates declining contango after the releases of each of the three major vaccine updates.

However, ING is skeptical about Brent’s recent backwardness in early 2022 given the outlook for weak short-term demand and fragile balance sheet in the first quarter of 2021, while the WTI curve makes more sense, with contango time spreads in the short term (reflecting weaker fundamentals) but with backwardation starting with the May 2021 contract.

• RALLY PRICE: The recent rally has prompted some to question the enthusiasm of some members to join extended cuts. “Clearly, if the market continues to strengthen between now and then, there is a risk that an increasing number of members of the agreement will become increasingly reluctant to reduce the rollover,” says ING, “the group would likely be more open to renewal. cuts if prices were to trade around the US $ 40 / bbl level, however with Brent rapidly approaching US $ 50 / bbl, there may be some opposition within the group to delay any easing of the cuts. ” Therefore, the bank sees the risk skewed to the downside: “OPEC + is unlikely to surprise with a six-month renewal given the latest price move, while the three-month renewal is already heavily priced. So anything less than that. three- The extension of the month is likely to be seen as bearish. “

Oil producers will need to take into account the supply-side developments since the launch of the DoC, events that were neither anticipated nor hypothesized at the time:

• LIBYA: Libyan crude oil production has seen a sharp rise in the past two months after the lifting of the blockages that saw exports from five key oil terminals halted in January, resulting in a drop in production to ~ 70k BPD versus ~ 1.1m Pre-block BPD, the latest Libyan production printed at ~ 1.2mln BPD. Libya is currently exempt from OPEC quotas and the head of the NOC has stated that he will join the allocations once production reaches 1.7 million BPD. OPEC had already said it will keep an eye on Libya-backed production. In that note, on November 23 an armed group attempted to enter the headquarters of the Libyan NOC, in turn rekindling fears for the country’s fragile production.
• UAE: Some desks are also considering potential complications from the UAE to increase their base share, thus resulting in more production from the nation. However, this risk is unlikely to materialize as the country’s Energy Minister recently noted “that all Opec-plus members should achieve full compliance with the existing agreement before the current level of cuts can be extended to next year, “according to EnergyIntel, while Goldman Sachs also warns that unilateral increases in production are likely to trigger a price war.
• IRAN: A Biden administration has increased the likelihood of Iranian oil returning to the market as expectations are named after the Democrat loosening some restrictions put in place by administrator Trump. That said, this comeback is unlikely to happen until the end of 2021/22, according to ING, “at that point, oil demand should have picked up enough to allow the market to absorb additional supply,” according to COVID. 19 and vaccine developments.
• NIGERIA: The desks note that Nigeria has complicated matters as it has advocated for the exclusion of production from its Agbami oil field from its quota on the grounds that its production should be classified as condensate rather than crude oil.

FORECASTS:

GS analysts predict that Brent will reach an average of USD 47 / barrel in the first quarter of 2021 assuming a three-month extension of the current cuts, while adherence to the current DoC (i.e. an increase in production of 2 million BPD ) would guarantee USD 42 / barrel over the period. “This illustrates once again how short-term revenue maximization is always due to production cuts, as an increase in production of 2 mb / d but a negative price impact of $ 5 / bbl would end up reducing by more than 5 billion. OPEC core and Russia’s fiscal revenues for Q1 21, “says GS. Meanwhile, UBS sees a Brent average of USD 45 / barrel in the first quarter of next year (see Figure 3 below), assuming a vaccine launch in 2021. “A 3-month extension protects the downside of prices as politics struggles to mitigate the waves of winter viruses. 2021 is a year of recovery and price normalization, ”the bank said.

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By Zerohedge

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