Opec+ meets with demand picture muddied by Omicron, SPR

The Opec+ coalition begins a series of meetings today at a time of extreme crude-price volatility, and in its deliberations on output policy for January will consider issues that were not on the cards when it last met a month ago.

A potentially more transmissible Covid-19 strain, named Omicron, and an upcoming strategic petroleum reserve (SPR) release by key crude buyers have muddied the demand picture, and may give Opec+ pause for thought.

The 23-nation group has so far stuck with its plan to raise its crude production quotas incrementally by 400,000 b/d each month since August, with the ultimate aim of restoring in full the production it removed from the market in May 2020 in response to the Covid-19-induced collapse in oil demand. At its November meeting the group dismissed calls from consumer countries, including the US, India and Japan, to accelerate these production hikes to address crude prices that exceeded $80/bl for the first time in close to three years. Opec+ snubbed these appeals and instead cited a prospective surplus in early 2022.

But with the US preparing for a 50mn bl SPR drawdown over the next few months, the coalition may now think about invoking a clause in its agreement that allows it to pause the production rises for up to three months. Front-month US WTI and Ice Brent crude futures fell sharply at the end of last week and again yesterday, and are down by around 15pc from the early-October highs.

Because of this, the Opec+ timetable shifted this week. Ministerial meetings were to be held after the Joint Technical Committee (JTC) and Joint Ministerial Monitoring Committee (JMMC), which study market conditions, met on 29 November and 30 November respectively. These are now taking place today and tomorrow respectively, with Opec ministers meeting today and the wider group tomorrow.

"As we want to work on it in detail, the JMMC meeting was moved so that we get more information about current events, including the new variant of the virus," Russian deputy prime minister Alexander Novak said earlier this week.

Both before and after the price declines, several Opec+ delegates questioned whether the stock releases alone warranted a move away from the plan to raise output by 400,000 b/d in January. The SPR release will have a "minor impact" on group deliberations, one said, noting that Opec+ is likelier to consider stocks and demand rather than prices.

"I do not see red flags that may pressure Opec+ to stop its release plan as agreed before, unless politics is to play its role," another delegate said. A third acknowledged the option to stop increases, but did not feel that would be required "at this time."

But the sell-off prompted by the new Covid-19 variant has left some delegates more open to the idea of holding production steady in January, particularly given the Opec+ tendency towards a cautious approach since embarking on its latest pact.

"For Opec+ to stand by this cautious approach, we are now looking at a very real possibility of a pause," one delegate said, given the projections of a looming build in OECD stocks from the start of next year. Another delegate flagged that observing both the Omicron spread and the price behaviour over the next two weeks was of utmost importance.

Opec's economic and technical think-tank, the Economic Commission Board, last week investigated the possibility that excess global supply could rise by 1.1mn b/d from previous forecasts in January and February next year, if 66mn bl is injected into the market by the SPR releases. A potential Omicron-led hit to demand would exacerbate this, with several major European economies already reintroducing some restrictions on travel.

But given the uncertainties that surround this new variant - the World Health Organisation said it poses a "very high" global risk and is likely to spread further, but does not know if it is associated with higher risks of transmission, reinfection and vaccine evasion - Opec+ could opt to rebuff calls for change and once again stay the course. Saudi energy minister Prince Abdulaziz bin Salman said this week he is "not worried" about the variant, and Russia's Novak warned against Opec+ being too hasty in its response to the changing market conditions.

By Nader Itayim and Ruxandra Iordache

Public link

Please use the above public link if you want to share this noodl on another website.