On Thursday, the oil cartel and its allies known as OPEC+ committed to boost their collective output above current levels by up to 500,000 B/D in January. The move means next year will begin with 7.2 million B/D in voluntary cuts vs. this quarter’s figure of 7.7 million B/D.
The new agreement has veered the export group off the original course established by its April agreement to cut collective output by 9.7 million B/D—the largest coordinated reduction of its kind in the industry’s history. Under the original pact, January curtailments were to be pegged at 5.8 million B/D.
“During November, the idea of delaying that easing in production restraint took hold,” Ann-Louise Hittle, a vice president with Wood Mackenzie, said in a statement.
“This reflected widespread concerns that weaker-than-expected global demand would lead to a large oversupply in the first quarter, unless OPEC+ held back from the nearly 2 million B/D planned increase.”
The next meeting in January will bring OPEC+ back together to decide whether to maintain the 500,000 B/D easing or to increase it by another 500,000 B/D. The quick turnaround for the next meeting, as opposed to quarterly gatherings, underscores the group’s awareness of a fragile market recovery.
Had OPEC+ held to its original timeline and added 2 million B/D of supply starting in January, the effect “would have been exhausting for the market, so the compromise is positive,” according to Bjornar Tonhaugen, head of oil markets at Rystad Energy.
The 13 members of OPEC will see their collective production ceiling raised by 304,000 B/D while the nine exporting nations that comprise OPEC+ will share an increase of 196,000, according to a report from S&P Global Platts.
This translates to a quota of more than 9.1 million B/D for Russia and Saudi Arabia. Iraq and UAE—the next two largest producers—will have output limits of 3.8 million and 2.6 million B/D, respectively.
Assuming the December agreement will be expanded upon, easing curtailments by another 500,000 in February and by the same margin again in March, Wood Mackenzie still expects to see an oversupply of 1.6 million B/D in the first quarter.
Much of the group’s decision-making early next year will depend on the continued recovery of Asian markets which have outperformed those elsewhere due to the continued spread of the COVID-19 pandemic.
While restrictions on travel and social gatherings remain in place across parts of North America and Europe, energy consumption in Asia represents the biggest source of analyst optimism since the continent is on track to return to pre-pandemic levels sometime next summer, according to Rystad.
“If that happens, and we even see some positive surprise in demand from vaccine rollouts actually impacting consumer behavior, OPEC+ can get away nicely with this staircase tapering during the next 4 months,” added Tonhaugen.
Following news of the deal, oil prices for West Texas Intermediate opened Friday at around $45/bbl and Brent crude at close to $49/bbl.
