This year has stretched Opec+ unity to breaking point – and indeed beyond – but heading into 2021 the alliance has regrouped and demonstrated a continued ability to overcome internal divisions. Ministers will be hoping that the next 12 months will be a relatively smooth runway towards ultimately ending production cuts in 2022, but if this pandemic has shown us anything, it is that the path ahead will contain further obstacles to be overcome.
Opec itself marked its 60th anniversary this year, and while the year panned out very differently to how it had hoped, the events brought about a newfound acknowledgement of the role of market management.
As Secretary General Mohammad Sanusi Barkindo told MEES, “there is recognition across the board that there is no short-term fix for the 2020 crisis, but in our talks and dialogues we hear acknowledgement of the role Opec and the DoC [Declaration of Co-operation between Opec and ‘Opec+’ countries] are playing in helping reduce volatility, and providing a platform for recovery and future growth” (MEES, 18 September).
Indeed, the past days alone have served up fresh highs and lows. Firstly, the start of the first mass vaccination program in the UK on 8 December sparked a wave of global optimism that helped lift Brent above $50/B for the first time since March. No sooner had the IEA cautioned against the “understandable euphoria” (MEES, 18 December) and countries were closing their borders to the UK amid concern over a new Covid-19 variant there.
Amid concern that the new variant was spreading faster than other strands, Saudi Arabia halted international flights and closed its borders. Kuwait and Oman did the same, while other countries also opted to impose further restrictions on international travel.
TIME TO TAPER?
Amid all this, Opec+ will meet on 4 January to decide whether to ease its cuts by up to 500,000 b/d in February. The group was originally planning to ease by 1.9mn b/d from 1 January but amid concerns over the slow pace at which demand was recovering it opted to add just under 500,000 b/d instead and meet monthly to decide whether to ease further (MEES, 4 December).
Observers had expected Opec+ to back increasing production on 4 January, and a 19 December meeting in Riyadh between Saudi Energy Minister Prince Abdulaziz bin Salman and Russian Deputy Prime Minister Alexander Novak did little to change expectations.
However, in a sign of just how quickly sentiment can change, Mr Novak said on 21 December that “In my opinion, the situation has changed over these two days… A new coronavirus strain appeared and this entailed, in particular, a major oil price correction we notice on markets. We did not see it two days earlier,” according to local media reports.
Amid such uncertainty, divergent opinions can easily arise, and the 4 January meeting may prove volatile.
Opec Production Begins The Journey Back From Its Covid-Lows (Mn B/D)
SAUDI BRINKSMANSHIP PREVAILS
The historic extent of the Opec+ cuts agreed upon in April and in place since May (MEES, 17 April) were all the more remarkable for what came before. The broad coalition had fallen apart in a tempestuous set of meetings in Vienna in early March as Russia resisted Saudi Arabia’s calls to deepen cuts as the first waves of the pandemic began to affect global markets (MEES, 6 March).
As delegates left those ill-fated talks it was clear where most were putting the blame. “Opec had put together a recommendation, the 1.5mn b/d… non-Opec obviously, especially Russia, needs more time for them to think about that. They are not ready today to sign, so we need more time. I don’t know how much time, I think now that Russia needs to think about it and hopefully we could reconvene, don’t ask me when, whenever the non-Opec countries are ready and hopefully get a decision,” said the UAE’s Minister of Energy Suhail al-Mazrouei.
As speculation mounted that the collapse of those talks would lead to unrestricted production, Saudi Arabia wasted little time in confirming those suspicions. Within days the government had ordered Saudi Aramco to ramp up output to its maximum 12mn b/d from 1 April and to expand capacity to 13mn b/d (MEES, 13 March). The UAE, and to a lesser degree Kuwait, swiftly followed suit.
The IEA was unimpressed and Executive Director Fatih Birol criticized producers for playing “Russian Roulette with oil markets.” He added that the situation had “no equal in oil market history,” and that the “world needs solidarity to face this challenge” (MEES, 13 March).
Nevertheless, this brinksmanship helped force Russia back to the table and paved the way for this year’s historic production cuts (MEES, 10 April).
LOOKING AHEAD TO 2021
While the story until recent weeks was about balancing the interests of Saudi Arabia and Russia to ensure that Opec+ continued to pull together, recent events have introduced a new wrinkle. The UAE has invested heavily in boosting production capacity and is eager to utilise it. Industry figures in Abu Dhabi appear to be highly wary of the risk of being left sitting on “stranded assets” if production curtailments continue much longer. Moreover, some argue that as a low-cost producer, why should Abu Dhabi cut to enable less efficient producers to take their market share?
Ultimately while the UAE might be dissatisfied with some of the restrictions imposed by Opec+, it is unlikely to take action within Opec that might risk threatening its highly-prized relationship with Saudi Arabia. However, Abu Dhabi may well adopt an increasingly assertive position within Opec+ in 2021.
All Opec+ participants, the UAE included, have benefited from the oil-price gains that stemmed from the production cuts. And while demand has improved since April’s depths, all are aware that a repeat of the March fallout would precipitate another price plunge. As Mr Barkindo told MEES, “we also appreciate that we cannot rest on our success so far. The green shoots need to bloom; they need to be nurtured. With this in mind, we remain fully focused on helping bring supply and demand back into balance and providing a more stable market for the remainder of 2020 and into 2021, in the interests of both producers and consumers.”
