January 05, 2021

OPEC+ Remains in Place -- For Now

UPDATE: Further developments pertaining to the OPEC+ with Saudi Arabia cutting its own production by an additional 1.0 million b/d from next month. This development has provided further support for oil prices with prices up by more than 5% -- and the price of Brent and WTI now both above $50.00. The unilateral cut indicates the level of concern that Saudi Arabia has with respect to weakening oil demand stemming from the impact of COVID-19 – and the desire to maintain the OPEC+ framework. While the action by Saudi Arabia helps mitigate the risk of unfavorable supply/demand environment, it exposes Saudi Arabia to the potential loss of market share in the short-term, if others (including Russia) take advantage of the opening and increase supply.  This type of response could create a tit-for-tat dynamic -- where Saudi Arabia would then respond by pushing more barrels onto the market -- and causing oil prices to collapse. 

It appears that Saudi Arabia and Russia reached an agreement with respect to oil production. The agreement keeps the production unchanged in February after the 500,000 b/d increase scheduled for January. The production increases are then to start again in March. The oil markets have reacted positively to the news of the agreement with oil prices increasing by more than 4.0%.

The development aligns with expectations expressed in our "What's Affecting Oil Prices" note published on December 28, 2020, in which we put forth the view that the OPEC+ would be cautious in raising supply (given the concerns about demand within the context of increasing cases of COVID-19) and that Saudi Arabia, Russia and the other members would be able to reach an agreement and keep the OPEC+ framework in place.

However, starting in Q2 of 2021, we expect that the supply from OPEC+ will increase more significantly -- in the order of 2.0 million b/d – which will reduce the previously-agreed (April 2020) production cuts of OPEC+ to around 5.2 million b/d. This strategy by OPEC+ will enable OPEC+ to maintain market share as demand increases – and to keep the oil prices at moderate levels (Brent staying in the range of $55 in the second half of 2021), which will curb increases in shale-related production.

While our expectations are that the OPEC+ framework will continue to hold, there are some potential geopolitical developments that could splinter group, including the following:

  • If the US decides to impose sanctions on Russia -- Putin could react by ending the coordination with OPEC in order to bring prices down and purposely damage investment prospects of US oil companies
  • If the Biden administration rejoins the JCPOA with Iran stopping uranium enrichment in exchange for lesser economic sanctions -- Saudi Arabia could react by increasing oil production rapidly to capture greater market share

Either of these developments will result in a wild rollercoaster ride for oil prices over the next several months – and even for the longer term.

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