OPEC+ SUCCESSFUL BALANCE

PLATTS - 24 Dec 2021 - After 11 meetings in 2021 to manage an erratic oil market, OPEC and its Russia-led allies look to have no respite in 2022, as the coronavirus pandemic and geopolitics figure to keep ministers on their toes. 

By October, the OPEC+ alliance is hoping to complete its comeback from the record production cuts implemented in mid-2020, with its plan to gradually raise quotas by 400,000 b/d each month. 

But the increasingly rampant omicron variant may get in the way, and further down the line, planned strategic petroleum reserve releases by the US and other key consuming countries and a potential Iran nuclear deal present supply considerations for OPEC+ members. 

The producer bloc, which controls about half of global oil supply and marked five years of cooperation in December, will have to continue calibrating its production policy through its monthly gatherings, while managing internal rivalries over market share that have bubbled over at times. 

"OPEC+ is poised to pause or cut if conditions warrant them to do so," said Ehsan Kohman, head of emerging markets research with investment bank MUFG. "What is clear is that there is a huge cloud of uncertainty weighing on global oil markets with volatility soaring to its highest since May 2020." 

The next OPEC+ meeting is scheduled for Jan. 4, though ministers have kept open the last one that convened Dec. 2, as they await more concrete data on the impacts of omicron. 

The variant has already caused business activity to slow as countries enact travel restrictions and containment measures, though OPEC's own analysts have so far dismissed the risk to the global economy as "mild and short-lived." 

Even so, the market is almost universally expected to tip from deficit into surplus in early 2022. 

OPEC+ delegates say with prices in a much better place today than they were at the start of 2021, they believe they can absorb any slump, given the expectations that demand will roar back in the back half of 2022 to hit pre-pandemic levels above 100 million b/d.

Speculate at your own risk

The group has helped steer Dated Brent to a roughly 50% rise over the last 12 months, from around $50/b at the start of the year to current levels of around $76/b, but with several wild swings.

The looming Q1 oversupply has already had some parts of the Brent complex flirting with contango in recent weeks -- a bearish structure that could undo OPEC+ efforts to drain global oil inventories and support near-term prices.

But OPEC+ officials have repeatedly warned traders not to bet against their ability to manage the market. Saudi energy minister Prince Abdulaziz bin Salman is fond of saying speculators will be left "ouching like hell," reiterating that mantra most recently on Dec. 14.

Wrangling 23 OPEC+ countries to agree on policy is no easy task, and the market presents no shortage of risks. Relations between members were tested at times in 2021, most notably the UAE's insistence on higher quotas holding up a July meeting for weeks.

However, the group was largely successful in balancing rising output while preventing prices from backsliding.

As a supply deficit intensified towards the end of the year, surging crude prices brought external pressure from the US, Japan and India for the group to accelerate its scheduled production increases.

Those entreaties were emphatically rebuffed, and the US has since organized a planned series of SPR releases with China, Japan, India, South Korea and the UK that could hit the market in the coming months.

Dwindling OPEC+ capacity

By then, the market could be at risk of a supply squeeze anyway.

Many OPEC+ members are already incapable of hitting their production targets, the result of years of underinvestment or mismanagement, exacerbated by the pandemic.

With Russia nearing its maximum capacity and Nigeria, Angola and several other countries struggling to maintain output, Platts Analytics forecasts that OPEC+ sustainable spare capacity will shrink to just 1.2 million b/d by June, lessening the group's ability to offset disruptions.

That spare capacity will be increasingly concentrated in Saudi Arabia, the UAE and Kuwait, widening the gaps between OPEC+ haves and have-nots -- a dynamic that will have to be managed if the market requires more of the bloc's crude.

"For OPEC+ to stay together it will need to become less flexible and dynamic in accommodating the wishes and needs of a very wide body of countries," said Bjarne Schieldrop, chief commodities analyst at Swedish bank SEB.

A revived Iran nuclear deal could loosen the market. The latest round of negotiations between the US and Iran resumed in December, but the two sides remain at an impasse.

Platts Analytics expects that if a framework agreement can be signed in Q1 with full sanctions relief in April, Iranian oil supply could increase by 800,000 b/d over the year.

But "risks of a no-deal scenario remain high," it said in a recent note. "If a deal cannot be reached, there is simply not enough global spare capacity, even in OPEC, to meet demand, so prices would have to increase to incentivize additional supply, or demand destruction may be required."

Figure on another busy year of monthly OPEC+ meetings, as the alliance looks to shepherd the market back to prepandemic health -- and beyond.

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