Opec set for annual meeting to discuss next phase of oil production policy

With a new president in the White House, the group's rival shale industry poses less of a threat

The 23-member alliance, known informally as Opec+ will factor in the prospect of several countries remaining under strict lockdowns, while at the same time meeting renewing demand for crude in Asia. ReutersShow less

Opec will convene its annual meeting virtually on December 1, alongside non-member producers, as the alliance faces a delicate balancing act of supporting prices, amid weakened demand and a surge in coronavirus cases.

The 23-member alliance, known informally as Opec+, will need to factor in several countries remaining under strict lockdowns, while at the same time meet renewed demand for crude in Asia.

The Saudi Arabia and Russia-led alliance also needs to brace for a possible return of crude from Iran and Venezuela over the coming months, which may dampen oil prices that have rallied for the fourth straight week.

Libya, a key Opec producer, has also ended nearly 10 months of force majeure and brought its oil barrels to market. Its output has surged to 1.25 million barrels per day following a political deal.

The North African country was producing between 80,000 and 140,000 bpd between February and September. Libya has so far been exempt from production cuts.

"There are no signs yet emerging that Libya’s export surge will tilt the oil market balance meaningfully into oversupply,” said Norbert Rücker, head of economics and next generation research at Julius Baer. "It is likely that the sentiment cycle is in the early stages of a shift towards bullish territory."

Oil rounded off four straight weeks of gains with Brent, the international benchmark, settling at $48.18, on Friday. West Texas Intermediate, the gauge for US crude, closed at $45.53 per barrel, a far cry from the -$40 per barrel in April because buyers were unable to offtake crude due to limited availability of storage.

Both benchmarks finished the week above 7 per cent. Optimism over vaccine trial results from the Pfizer-BioNTech collaboration, Moderna and AstraZeneca have fuelled a rally in global stock markets and an upswing in oil prices.

Despite current market conditions, Opec+ has cause for concern. Libyan production is likely to exert a downward pressure on markets. The rising number of Covid-19 cases, which are currently above 62 million, pose a persistent challenge as countries impose lockdowns and movement restrictions, which impact oil demand. Widespread inoculation will take time as companies need to get the necessary regulatory approvals and scale up production of vaccines.

Opec+, which swung to action earlier this year to enact an historic production cut of 9.7m bpd with plans for a gradual tapering, is likely to keep up its current momentum of curbs.

The group, which has been cutting at the level of 7.7m bpd is likely to maintain this volume until the end of the first quarter of 2021, reversing earlier plans to marginally increase production.

"We expect the group to delay this increase by at least three months for several reasons," said Giovanni Staunovo, commodity analyst with UBS. "Mobility restrictions across Europe and in some US states will dent oil demand in 4Q20 and potentially in 1Q21, oil demand tends to weaken seasonally in the first half of each year, and higher Libyan oil production.”

The bank is maintaining a bullish outlook for Brent at $60 per barrel by the end of 2021. Others such as Standard Chartered have a more muted assessment, expecting Brent to average $44 next year.

There will be one less headache for Opec+ going into the new year is US shale as more bankruptcies in the industry accelerate. A number of shale independents and refiners have folded leaving the number of rigs at 241 as of last week, according to Baker Hughes. That is around one-third of the number in March.

The world's largest producer of hydrocarbons is unlikely to see revival to record levels of production following the debilitating impact of Covid-19 on the US shale industry. With the new US administration unlikely to favour the shale industry, Opec will remain the only swing producer in the market.