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OPEC+ inaction could lead to 200 million barrel surplus next year, Rystad says

Oil pumping jacks, also known as "nodding donkeys", operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020.  Photographer: Andrey Rudakov/Bloomberg
Oil pumping jacks, also known as "nodding donkeys", operate in an oilfield near Almetyevsk, Tatarstan, Russia, on Wednesday, March 11, 2020. Photographer: Andrey Rudakov/Bloomberg

Oil markets could be saturated with millions of surplus barrels if OPEC+ fails to agree an extension to current production cuts, according to analysis from Rystad Energy.

Discussions between members of the cartel, which is in control of around half the world’s crude, got underway earlier today, with a decision on output for 2021 expected in the coming days.

Until recently the coalition had been expected to agree a three month extension to its currently curtailed production but divisions emerged over the weekend.

Some want to boost production in order to make the most of a rise in the oil price resulting from the recent Covid-19 vaccine breakthrough while others remain cautious about the market’s ability to withstand a supply side shock.

Rystad has warned that if output increases by two million barrels per day (bpd) as planned from January, it would lead to a new 200 million barrel surplus through May.

According to analysis, unless action is taken, the world in January will face its biggest monthly glut since April 2020, with an average excess of 3.1 million bpd for the month.

Rystad expects the imbalance to continue for the first five months of 2021, before finally starting to shrink from June.

It noted that the existing OPEC+ group deal drawn up during the first wave of Covid-19 “saved the market from collapsing”.

However, Rystad said the cartel’s forecast for oil demand at the end of 2020 turned out to be “too high” as the pandemic’s second wave forced many economies back into lockdown.

Bjornar Tonhaugen, head of oil markets at Rystad, said that the current agreement, which would result in a production increase from January 2021, could send Brent “back down to $40 per barrel or lower”.

He added that a three-month extension would only provide “marginal support to prices” but would help to establish a “sturdier floor” of $50, while a six-month could help to “meaningfully deplete the storage overhang”.

Tonhaugen claimed: “In a way, OPEC+ is already locked into extending its current cuts for some period in 2021 and probably knows it will be punished by the market if it doesn’t do so.”

Rystad said it expects the second wave of Covid-19 cases to continue to surge through the end of this year and have a residual effect on oil demand in 2021, causing a slow recovery.

At present, it forecasts that demand for total liquids will not surpass 93 million bpd before year-end 2020.

According to Rystad, should the OPEC+ cut extension go through, the primary benefactor will be shale, which it described as the “most flexible marginal supply source on the market.”

Tonhaugen concluded: “The breakup of the OPEC+ deal in March 2020, when participants failed to agree on an additional 1.5 million bpd of cuts, sparked a full collapse in oil prices with a drop of $10 per barrel from the time the decision was made public until markets opened the following Monday.

“These were of course special circumstances, but a vote of no confidence from OPEC+ this week would surely be crushing for oil prices, though perhaps to a milder degree this time.”

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