When OPEC and its allies met last month, Saudi Arabia’s energy minister dared oil speculators to test his determination to stabilize global markets.
Now that a revived pandemic is once again threatening demand, the moment of reckoning is approaching.
The Coalition of Raw Producers meets on Monday to assess the market situation. No supply decision is expected until December 1, but key members Saudi Arabia and Russia are already stepping up diplomacy. President Vladimir Putin and Saudi Arabia’s Crown Prince Mohammed Bin Salman have spoken by telephone twice in a week – the first time the country’s leaders have done so since the deepening oil crisis in April, when they were making a deal to reduce supply and bring the price war to an end.
With oil stuck at around $ 40, and more supplies coming from Libya, the cartel is now under pressure to revise its plan to ease those production cuts. It has already relaxed by about 2 million barrels a day and is expected to add another 1.9 million in January.
While members are publicly adhering to that plan for now, OPEC Secretary-General Mohammad Barkindo acknowledged on Thursday that demand is anemic and the cartel will act to prevent a market reversal. Its own internal reports indicate the risk of a new surplus. And privately, delegates admit they are open to delaying growth when a formal decision is made in six weeks.
Market influential voices already tell OPEC + to be cautious about planned growth.
Trading houses like Mercuria Energy Group, banks including JPMorgan Chase & Co. and institutions such as the International Energy Agency are advising that markets remain too fragile to easily absorb extra barrels.
Adding oil to the market at such a time is not an advisable range, said Natasha Kaneva, an analyst at JPMorgan in New York.
These views can be taken into account during Monday’s online session of the Joint Ministerial Monitoring Committee, chaired by Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman and his Russian counterpart Alexander Novak. The panel will not decide on the supply for the coming years, which will be finalized at the largest ministerial meetings on November 30-December. 1
Decisions is a decision that will have profound implications not only for the Organization of the Petroleum Exporting Countries – many of whose member countries need prices well above current levels to cover government spending – but also the wider industry, from drillers. of clay to large branches such as Exxon Mobil Corp.
Glimmer of Hope
There has recently been a glimmer of hope for oil prices that producers need to be careful not to drop them.
Global demand for oil has recovered to 94% of pre-pandemic levels, depleting the world’s inflated inventories, according to the International Energy Agency. Shoppers in China, the world’s second-largest consumer, are set to boost purchases after slowing down over the summer. Indian refineries are setting up operations in front of nations two major festivals.
The strongest consumption by the two Asian giants will play a big part in the final decision in December. Ministers will also consider input from other parts of the world as the virus spreads and the outcome of the U.S. presidential election in early November.
But a full return to previous levels of demand will take several years, especially for aircraft fuel, predict trading houses like Vitol Group and Trafigura Group. OPEC + should also keep global reserves away to avoid another concern and a drop in prices.
If the group increases production as planned in January, then we will no longer withdraw gross stocks, said Torbjorn Tornqvist, chief executive of Gunvor Group Ltd. in an interview.
Another reason to delay growth has emerged recently as Libya, excluded from trying to curb supply, resumes production.
The OPEC Nation has increased production fivefold in just a few weeks after a military commander allowed the ports to open. It is now pumping 500,000 barrels a day after the resumption of its largest oil field and the IEA estimates that another 200,000 a day could be added by the end of the year.
An internal report presented to an OPEC + technical committee last week showed that the group is aware of the risks. While his central scenario predicted that global oil reserves would fall by 1.9 million barrels per day next year, he warned that if Covid-19 hits demand more than expected and Libya makes a strong recovery, inventories could accumulate less .
Delaying the concept of planned production would bring its own complications, however, as countries would have to abandon the revenue that additional production could bring.
Another issue will be the backlog of compensatory supply cuts that nations like Iraq and Nigeria owe in exchange for broken quotas in the initial months of the deal. Saudi Arabia and Russia have urged other members to honor their production commitments as oil prices come under new pressure.
Right now, when demand is fragile and Covid-19 issues are resurfacing, all manufacturers have an incentive to work together, said Helima Croft, head of commodity strategy at RBC Capital Markets LLC.
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