OPEC+ fears second Covid-19 wave could lead to oil surplus in 2021

 

OPEC and its allies fear a prolonged second wave of the Covid-19 pandemic and a jump in Libyan output could push the oil market into surplus next year, according to a confidential document seen by Reuters, a gloomier outlook than just a month ago.

A panel of officials from OPEC+ producers, called the Joint Technical Committee, considered this worst-case scenario during a virtual monthly meeting on Thursday. In September, the panel had not seen a surplus under any scenarios it considered.

Such a surplus could threaten plans by OPEC, Russia and allies, known as OPEC+, to taper record output cuts made this year by adding 2 million bpd of oil to the market in 2021.

The Organization of the Petroleum Exporting Countries has not indicated any plan so far to scrap that supply boost.

"The earlier signs of economic recovery in some parts of the world are overshadowed by fragile conditions and growing scepticism about the pace of the recovery," according to the document used in the panel's monthly meeting in October.

"In particular, a resurgence of Covid-19 cases across the world and prospects for partial lockdowns in the coming winter months could compound the risks to economic and oil demand recovery," it said.

The document presented scenarios that included a base case that still showed a deficit in 2021 of 1.9 million barrels per day (bpd) on average, albeit less than the deficit of 2.7 million bpd forecast in the previous month's base case.

But under its worst-case scenario, the document said the market could flip into a surplus of 200,000 bpd in 2021.

This year, OPEC+ agreed to make record output cuts to support plunging prices as oil demand collapsed. It cut 9.7 million bpd from May, tapering that to 7.7 million bpd from August. From January, cuts are due to ease to 5.7 million bpd.

However, since the JTC met in September, Libyan output has climbed and a global rise in coronavirus cases has led to renewed restrictions on movement in some countries, weakening demand for crude.

OPEC-member Libya is exempt from any production cuts.

Under the document's worst-case scenario, Libyan production would rise in 2021 to as much as 1.1 million bpd, a source familiar with the details of the meeting said. Under its base case, Libyan output would be 600,000 bpd in 2021.

Under the worst-case scenario, OECD commercial oil inventories - a benchmark OPEC+ uses to gauge the market - would remain high in 2021 compared to the five-year average rather than starting to fall below that mark.

This scenario also sees a stronger and more prolonged second wave of Covid-19 in the fourth quarter of 2020 and first quarter of 2021 in Europe, the United States and India leading to a lower economic recovery, weakening oil demand.

Under the document's base case, OECD oil stocks are expected to stand slightly above the five-year average in the first quarter of 2021, before falling below that level for the rest of the year.

A ministerial OPEC+ panel, known as the Joint Ministerial Monitoring Committee (JMMC), will consider the outlook when it meets on Monday. The JMMC can make a policy recommendation.

Oil ministers from OPEC+ countries are scheduled to meet again on Nov. 30-Dec. 1.

Moscow suggests OPEC+ to tackle demand dip, Saudi says no talks on new deal

Saudi Arabia said on Friday it was not in talks with Russia to balance oil markets despite rising pressure from Washington to stop a price rout amid the coronavirus pandemic and an attempt by Moscow to fix a rift with the de facto OPEC leader.

A three-year supply pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers, including Russia, fell apart this month after Moscow refused to support Riyadh's plan for deeper production cuts, prompting Saudi Arabia to pledge to raise output to a record high.

The resulting supply boost has coincided with plummeting demand as governments around the world implement national lockdowns to slow the spread of the coronavirus. The twin-pronged assault on prices has sent Brent crude to a 17-year low below $25 a barrel and hammered the income of oil producers.

"There have been no contacts between Saudi Arabia and Russia energy ministers over any increase in the number of OPEC+ countries, nor any discussion of a joint agreement to balance oil markets," an official from Saudi Arabia's energy ministry said, referring to the wider grouping of oil producers.

The comment came after a senior Russian official said on Friday that a larger number of oil producers could cooperate with OPEC and Russia, in an indirect reference to the United States, the world's biggest producer which has never cut production.

"Joint actions by countries are needed to restore the (global) economy ... They (joint actions) are also possible in the OPEC+ deal's framework," said Kirill Dmitriev, the head of Russia's sovereign wealth fund.

ALSO READ: Coronavirus impact: Brent crude dives over 7% to lowest since 2003

Dmitriev and Energy Minister Alexander Novak were Russia's top negotiators for the previous OPEC pact, which officially expires on March 31. Dmitriev declined to say which nations could be included in a new deal.

The deal between OPEC and Russia broke down after Moscow declined to support bigger output curbs, arguing that it was too early to estimate the pandemic's impact.

Officials and oil executives in Russia have been split on the need for cuts with Dmitriev and Novak supporting cooperation while the head of Kremlin oil major Rosneft, Igor Sechin, has criticised the cuts as providing a lifeline to the less competitive US shale industry. President Vladimir Putin has said little since the OPEC+ deal collapsed.

"ECONOMIC WARFARE"

The idea of Washington cooperating with OPEC has long been seen as impossible, not least because of US antitrust laws. US President Donald Trump has repeatedly expressed anger with the cartel because its actions lead to higher prices at the pump.

However, Saudi Arabia's latest move has put Washington in a difficult position - its battle for market share has led to very low prices but also undermined the US shale industry, which has much higher costs than Saudi or Russia production.

The US administration is facing multiple calls to save the highly leveraged shale industry, which has borrowed trillions of dollars to allow the country to become a large oil and gas exporter despite often uncompetitive costs.

A group of six US senators wrote a letter to Secretary of State Mike Pompeo this week saying Saudi Arabia and Russia "have embarked upon economic warfare against the United States" and were threatening US "energy dominance".

They called on Saudi Arabia to quit OPEC, reverse its policy of high output, partner with the United States in strategic energy projects or face consequences.

"From tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else, the American people are not without recourse," the senators, including John Hoeven of North Dakota and Lisa Murkowski of Alaska, said in a letter.

ALSO READ: ONGC, Oil India stare at steep earnings cut as crude price crashes

Two other senators from oil-producing states introduced a bill on Friday that would remove US armed forces from the kingdom.

Trump last week said he would get involved in the oil price war between Saudi Arabia and Russia at the appropriate time.

US Energy Secretary Dan Brouillette, meanwhile, told Bloomberg TV on Monday that forging a US-Saudi oil alliance was one of "many, many ideas" being floated by US policymakers.

The head of the International Energy Agency, an adviser to the United States and other industrialised countries, on Thursday also called on Saudi Arabia to help stabilise the market.

Algeria, which holds the OPEC presidency at present, has called for a meeting of the group's Economic Commission Board to be held no later than April 10 to discuss current oil market conditions.

US President Donald Trump last week said that he would get involved in the oil price war between Saudi Arabia and Russia at the appropriate time.

Adding further pressure, the head of the International Energy Agency, an adviser to the United States and other industrialised countries, on Thursday called on Saudi Arabia to help stabilise the market.

OPEC, meanwhile, wants to look at ways to support the market. Algeria, which holds the OPEC presidency at present, has called for a meeting of the group's Economic Commission Board to be held no later than April 10.

"ECONOMIC WARFARE"

The idea of Washington cooperating with OPEC has long been seen as impossible, not least because of US antitrust laws. US President Donald Trump has repeatedly expressed anger with the cartel because its actions lead to higher prices at the pump.

However, Saudi Arabia's latest move has put Washington in a difficult position - its battle for market share has led to very low prices but also undermined the US shale industry, which has much higher costs than Saudi or Russia production.

The US administration is facing multiple calls to save the highly leveraged shale industry, which has borrowed trillions of dollars to allow the country to become a large oil and gas exporter despite often uncompetitive costs.

A group of six US senators wrote a letter to Secretary of State Mike Pompeo this week saying Saudi Arabia and Russia "have embarked upon economic warfare against the United States" and were threatening US "energy dominance".

They called on Saudi Arabia to quit OPEC, reverse its policy of high output, partner with the United States in strategic energy projects or face consequences.

"From tariffs and other trade restrictions to investigations, safeguard actions, sanctions, and much else, the American people are not without recourse," the senators, including John Hoeven of North Dakota and Lisa Murkowski of Alaska, said in a letter.

Two other senators from oil-producing states introduced a bill on Friday that would remove US armed forces from the kingdom.

Opec cuts 2020 demand forecast by a third amid Coronavirus worries

Opec slashed forecasts for global oil demand as coronavirus hits fuel use in China, leaving the group facing a renewed glut despite its recent production cuts.

The cartel reduced projections for demand growth in the first quarter by 440,000 barrels a day, or about a third, in its monthly report. Oil prices sank to a one-year low on Monday as the infection leaves businesses idle and millions quarantined in the world’s biggest crude importer.

Oil’s slump has spurred the Organization of Petroleum Exporting Countries’ (Opec’s) biggest exporter, Saudi Arabia, to press fellow members and allies to hold an emergency meeting and consider new output cutbacks. Yet the proposal has so far met resistance from Russia, the group’s most important ally, which is able to weather lower prices more easily.

The report showed that, even though many Opec members made a strong start with fresh output curbs that took effect last month, the virus’ impact on consumption will leave them with a new overhang. The group collectively pumped 28.86 million barrels a day in January, and if it maintains that rate there will be a surplus of 570,000 barrels a day during the second quarter, when consumption slows down seasonally. The monthly report is compiled by Opec’s Vienna-based research department.

Opec doesn’t see the effects of the disease confined to the start of the year, bringing down its growth estimate for global oil demand in 2020 as a whole by about 230,000 barrels a day to just under 1 million a day. Still, the increase remains slightly higher than last year’s.

Though crude futures have recovered on speculation the spread of the disease could be nearing its peak, prices of about $55 a barrel in London remain well below the levels most Opec members need to cover government spending.

OPEC extends oil supply cut to prop up prices as economy weakens

OPEC agreed on Monday to extend oil supply cuts until March 2020, three OPEC sources said, as the group's members overcame their differences in order to prop up the price of crude amid a weakening global economy and soaring U.S. production.

The move will likely anger U.S. President Donald Trump, who has demanded OPEC leader Saudi Arabia supply more oil and help reduce prices at the pump if Riyadh wants U.S. military support in its standoff with arch-rival Iran.

Benchmark Brent crude has climbed more than 25% so far this year after the White House tightened sanctions on OPEC members Venezuela and Iran, slashing their oil exports.

OPEC and its allies led by Russia have been reducing oil output since 2017 to prevent prices from sliding amid soaring production from the United States, which has overtaken Russia and Saudi Arabia as the world's top producer.

Fears about weaker global demand as a result of a U.S.-China trade spat have added to the challenges faced by the 14-nation Organization of the Petroleum Exporting Countries.

"Saudi Arabia is doing its best to achieve oil prices at $70 per barrel despite what Trump wants. But they haven't accomplished that even with Iranian and Venezuelan oil exports dropping. And the reasons for that are weak demand and U.S. shale growth," said Gary Ross from Black Gold Investors.

The United States, also the world's largest oil consumer, is not a member of OPEC, nor is it participating in the supply pact. A jump in oil prices might lead to costlier gasoline, a key issue for Trump as he seeks re-election next year.

Brent initially rose as much as $2 on Monday towards $67 per barrel as traders cited OPEC's resolve to curb output. It later edged down to trade below $65. [O/R]

WORSENING GEOPOLITICAL RISK

The OPEC meeting on Monday will be followed by talks with Russia and other allies, a grouping known as OPEC+, on Tuesday.

Russian President Vladimir Putin said on Saturday he had agreed with Saudi Arabia to extend existing output cuts of 1.2 million barrels per day, or 1.2% of global demand, until December 2019 or March 2020.

Oil prices could stall as a slowing global economy squeezes demand and U.S. oil floods the market, a Reuters poll of analysts found.

"I think nine months gives us enough runway to wait for the market to balance," Saudi Energy Minister Khalid al-Falih said.

He said Saudi Arabia would continue reducing supplies to customers in July.

"The reason for extending the deal by nine months instead of six is to assure the markets that the deal will remain in place through the seasonally soft demand period in the first quarter of 2020," said Amrita Sen, co-founder of Energy Aspects.

The meeting on Monday was in its fifth hour as ministers discussed a charter for long-term cooperation with non-OPEC, OPEC sources said, adding that Iran and Saudi Arabia were arguing about the content of a draft.

On Monday, Iran criticised Saudi Arabia for making decisions on OPEC policy unilaterally with Russia, saying such action was the main challenge for the survival of the organisation.

Iran's exports plummeted to 0.3 million barrels per day in June from as much as 2.5 million bpd in April 2018 due to Washington's fresh sanctions.

Oil output in OPEC's exempt nations: https://tmsnrt.rs/2Fx7Lcc

The sanctions are putting Iran under unprecedented pressure. Even in 2012, when the European Union joined U.S. sanctions on Tehran, the country's exports stood at around 1 million bpd. Oil represents the lion's share of Iran's budget revenues.

Washington has said it wants to change what it calls a "corrupt" regime in Tehran. Iran has denounced the sanctions as illegal and says the White House is run by "mentally retarded" people.

"Worsening tensions between the U.S. and Iran add potential for oil price volatility that could be tricky for OPEC members to manage," said Ann-Louise Hittle, vice president, macro oils, at consultancy Wood Mackenzie.

Putin says Russia and Saudi Arabia will maintain oil cuts for 6-9 months

Russian President Vladimir Putin struck a deal with Saudi Crown Prince Mohammed Bin Salman to extend the Opec+ agreement at current production levels for the rest of this year and potentially into early 2020.

Speaking at the Group of 20 summit in Japan, the Russian president said the extension of output cuts -- which expire at the end of June -- could be for six or nine months. His comments make the outcome of next week’s Opec+ gathering in Vienna all but a foregone conclusion, and further reinforce Putin’s role as the ultimate policy maker within the group.

Saudi oil officials later confirmed their support to the extension, although cautioned they still needed to discuss the deal with other Opec ministers.

Riyadh and Moscow ended years of animosity in 2016, joining forces to manage the global oil market in an effort to prop up prices. The current version of the deal by the so-called Opec+ coalition calls for production cuts of 1.2 million barrels a day.

“We have agreed: we will continue our agreements,” Putin said in Osaka. “In any event we will support the continuation of agreements, both Russia and Saudi Arabia, in the volumes previously agreed.”

The announcement marks the first time a senior leader from the group has indicated the curbs could be needed into 2020. That reflects a somber outlook for oil supply and demand next year due to a combination of slowing global economic growth and rising US shale output.

Trade Deal

The Russia-Saudi deal followed an agreement made earlier in Osaka between the US and Chinese presidents to restart trade talks, and comments by Donald Trump that he wouldn’t impose new duties on Beijing for now.

“The Saudi-Russia deal, combined with a positive outcome from the US-China trade talks at the G-20, should allow oil prices to move higher,” said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in London.

The alliance between the Organization of Petroleum Exporting Countries and its partners has had a mixed track record of supporting oil prices, in part because some members have at times overproduced. Since Russia and Saudi Arabia came together to manage the market in late 2016, benchmark Brent crude has oscillated between $45 and $85 a barrel. On Friday, Brent futures for September closed at $64.74.

Hours after the Osaka meeting, Saudi Energy Minister Khalid Al-Falih said on his arrival to Vienna for the Opec meeting that the kingdom supported extending the deal for another nine months until early 2020. "But we have to talk to other ministers," he cautioned on the early hours of Sunday in the Austrian capital.

OPEC ministers are scheduled to meet on July 1 in Vienna to discuss their production policy for the next few months. On July 2, oil ministers from non-OPEC nations will join the talks. Saudi Arabia and Russia are the largest members in the group, and usually both nations are able to steer the Opec+ alliance into their preferred policy. Yet, others may oppose. In the past, Iran has put up fierce fights to the position of Riyadh.

Al-Falih warned the extension of the production cuts was needed as oil demand growth had “softened a little bit,” but said there wasn’t a need to deepen them. Earlier, the Saudi oil minister said in a tweet that the Russian-Saudi deal to extend the production cuts would "help reduce global stockpiles" of crude oil "and thus balance the market."

For Moscow, there’s an extra incentive to extend the curbs by nine months, as Russian oil companies struggle to raise production over the winter. By extending the deal into 2020, Russia could be in a better position to pump more during the spring of next year.

A long extension could also be an acknowledgment by Russia of the impact of the massive Druzhba pipeline outage on its production capacity. The country’s oil output has fallen in recent weeks as a result of on-off flows through the link, parts of which were suspended two months ago amid the contaminated-crude crisis.

This year the Opec+ alliance has cut production by more than the pledged 1.2 million barrels a day as US sanctions on Iran and Venezuela slashed output from both countries. Saudi Arabia also unilaterally made deeper curbs, pumping 9.7 million barrels a day in May, compared with its Opec+ ceiling of 10.3 million.

Saturday’s verbal agreement between Putin and Prince Mohammed highlights the importance of the G-20 as a key policy-making forum for oil and Opec watchers. Last year, Putin and the crown prince used the summit in Buenos Aires to give their political backing to extend the Opec+ deal into the first half of 2019. A few days later, with clear instructions from their leaders, the respective oil ministers met and agreed on the details of cuts.

The G-20 in 2016 in Hangzhou, China, also proved pivotal for the oil market, with Putin and the crown prince forging a rapprochement between the world’s top two oil exporters. Since that meeting, the two nations have cooperated on output policy as de facto leaders of the Opec+ coalition, which includes all the members of Opec plus a handful of independent producers including Mexico, Azerbaijan and Kazakhstan.

“The strategic partnership within Opec+ has led to the stabilization of oil markets” while supporting global economic growth, Kirill Dmitriev, head of the Russian Direct Investment Fund, said on Saturday following the talks.

As further proof of the importance of the G-20 for the Opec negotiations, Saudi Arabia and Russia recently lobbied fellow Opec+ nations to reschedule their Vienna meeting, shifting it by a few days so oil ministers would gather just after Putin’s sit-down with the crown prince, rather than before as originally planned. Opec+ will meet in the Austrian capital on July 1-2.

Oil prices tumble as Donald Trump dials Opec to lower gasoline prices

Oil prices fell the most since December as US President Donald Trump pressed Opec to lower prices, and doubts grew about the impact of supply squeezes from Russia and Iran.

Futures in New York fell as much as 4.5 per cent on Friday, wiping away gains from earlier in the week that had followed the US’ vow of tougher sanctions on Iran. Trump, speaking at the White House, said he’d called the producer cartel and demanded it reduce gasoline prices. Reports of readily available replacements for contaminated Russian oil also sapped momentum.

Crude hit a 6-month high this week after the US said it wouldn’t renew waivers, allowing China and other major economies to import 1.4 million Iranian barrels a day. Yet how tight those sanctions will ultimately be remains in question and investors may have been ready for a pullback anyway, with optimistic bets on prices far outweighing pessimistic ones, said Bob Yawger, futures director at Mizuho Securities USA.

West Texas Intermediate for June delivery slid $2.37 to $62.84 a barrel on the New York Mercantile Exchange as of 9:32 pm (IST), in its biggest intraday loss since December 24. The contract was on track for its first weekly loss in two months.

Brent for June settlement was down $2.60, or 3.5 per cent, at $71.75 a barrel on the London-based ICE Futures Europe exchange, just a day after topping $75. The global benchmark crude was at a premium of $8.91 to WTI on Friday.

US sanctions on Iran and Venezuela have helped push oil prices up this year, along with orchestrated cuts by the Organization of Petroleum Exporting Countries (Opec) and other big producers. That’s started to become apparent for American consumers at the pump, with gasoline futures rising 12 percent in April and up 56 percent this year. They fell as much as 3.2 per cent on Friday.

“The gasoline prices are coming down,” Trump told reporters at the White House. “I called up OPEC and said you’ve gotta bring ‘em down.”