OPEC‐plus proves up to the challenge

• Date: 01 August 2020
• Published date: 01 August 2020
• DOI: http://doi.org/10.1111/oet.12812

LOOKING AHEAD

OPEC-plus proves up to the challenge

OPEC-plus has excelled in its ability to impose the big-

gest cuts the global oil market has ever seen—by some

margin—which has led to a recovery of equilibrium in

the markets, and a modest rise in prices.

As the Covid-19 virus hit earlier this year, OPEC and

10 allies, including Russia, agreed to a record 9.7 mn bpd

production cut starting in May to balance the biggest

shock to demand that oil markets have ever seen,

*

and

provide some support to tumbling prices. Three months

on, and this has largely been achieved, helped by high

compliance rates among the OPEC-plus coalition—which

managed an impressive 107% compliance with the huge

target in June. Oil prices are up, with front-month ICE

Brent futures more than doubling from historic lows in

April to stabilize at around $43/bbl for a lengthy period

through July.

As for OPEC itself, its 13 members pumped just 22.27

mn bpd in June—down about 7 mn bpd on June 2019,

and nearly 2 mn bpd below May's figure, thanks to a

combination of 1.11 mn bpd of additional voluntary cuts

from Saudi Arabia, UAE, and Kuwait (June only), along

with improved compliance elsewhere.

The cuts are set to roll back to 7.6 mn bpd in August

through until the end of the year, although this will be

augmented by some additional cuts to make up for

under-compliance so far by some members—so the

actual August cut is likely to be closer to 8.2 mn bpd.

Saudi Arabia and other Gulf producers have led a clamp-

down on quota-busters, and OPEC has agreed that short-

falls should be made up for in subsequent months. There

are signs that the guilty parties are already attempting to

catch up, which is further helping support sentiment.

The biggest overproducer is Iraq, which has a target

cut of 1.06 mn bpd from production of around 4.65 mn

bpd. In May it only managed to cut 520 000 bpd. This

was tightened by an additional 440 000 b/d in June, to

bring output down to 3.7 mn bpd or just 100 000 bpd over

quota, according to MEES. This means Iraq will have to

make additional cuts of 320 000 bpd for another

2 months, which is its average under-compliance to end

June. This may be easier to do as the underlying quotas

are relaxed from August.

Nigeria was the second biggest OPEC over-producer,

with output of 1.58 mn bpd in June, 170 000 bpd more

than its 1.41 mn bpd allocation. Other over-producers

include Angola, and non-member Kazakhstan.

1|LOOKING AHEAD

In its latest Monthly Oil Market Report

†

(released July

14), OPEC expects global oil demand will rebound

strongly in the second half of 2020, which should leave

ample room to boost supplies and reclaim market share

as the world recovers from the pandemic. Overall, OPEC

expects to be able to lift output from 20.60 to 21.82 mn

bpd over coming months, minus any adjustment for ear-

lier under-compliance.

Saudi Arabia and Kuwait have already brought back

production from the shared Neutral Zone on July 1st

(which only began producing at the beginning of the

year), as they ended their voluntary June cuts. However,

Saudi Energy Minister Prince Abdulaziz bin Salman said

that even though Saudi output would rise by 500 000 bpd

in August, all the additional oil would be consumed at

home, so exports would not change.

In the report, OPEC boosted its forecast of 2020 oil

demand by 130 000 bpd to 90.72 mn bpd. And in its first

2021 market outlook, OPEC projected oil demand would

rise to 97.72 mn bpd—still below pre-pandemic levels but

up sharply from the second quarter of 2020. It forecasts

that diesel and gasoline will achieve a record-breaking

rise in 2021 of more than 3.8 mn bpd, while jet fuel will

only gain 800 000 bpd from the very low levels this year.

The International Energy Agency (IEA), which issued

its latest forecasts on July 10th,

‡

is even more bullish, see-

ing 2020 oil demand at 92.1 mn bpd and 2021 demand a

little lower at 97.4 mn bpd—assuming the virus is con-

tained and governments maintain massive stimulus mea-

sures. In its July Short-Term Energy Outlook,

§

the US

Energy Information Agency (EIA) says that oil markets

had shifted from 21 mn bpd of oversupply in April to

inventory draws (indicating supply tightness) in June,

which it says are expected to continue through to the end

of 2021 as oil demand recovers. However, by the end of

July, rising Covid-19 cases and falling activity numbers in

Europe and elsewhere,suggest the impact of the pandemic

on demand could be more drawn out than expected.

DOI: 10.1111/oet.12812

16 © 2020 John Wiley & Sons Ltd Oil and Energy Trends. 2020;45:16–17.wileyonlinelibrary.com/journal/oet