Opec+, the producer alliance behind historic oil market corrections, is likely to gradually increase supply as it looks to drain inventories while placating members with biting economic needs.
The group, led by Saudi Arabia and Russia, two of the world's largest producers, are convening for an extraordinary meeting on January 4 to assess current oil market metrics as well as overall compliance among producers.
The meeting follows a protracted online annual gathering last month, where the producers agreed to increase production by 500,000 barrels per day.
Opec+ agreed to cut output by 7.2 million bpd for three months until the end of March. However, the group, which was originally scheduled to bring on stream nearly 2m bpd by the beginning of the year, will have to accommodate various interests of producers who are looking to cash in on higher prices to offset difficult economic conditions.
Brent, the international marker, has traded above $50 per barrel for nearly half of December and settled 0.33 per cent higher at $51.8 per barrel on Friday. West Texas Intermediate, which tracks US crude, has also trended higher, settling at $48.52 per barrel, up 0.25 per cent.
The benchmarks have been buoyant amid positive news on vaccines, as several countries roll out inoculation programmes. However, Covid-19 cases are on the rise across the world during the December-January holiday season and nations remain wary of a new, more infectious, strain of the virus that originated in the UK.
The temptation to increase output is particularly strong among producers such as Iraq, whose economy has been squeezed by lower global demand for crude amid the pandemic and its domestic health crisis.
Baghdad last month devalued its currency by around 23 per cent against the US dollar, the first adjustment in the currency peg since 2015.
Under the country’s provisional budget, an allocation of 150 trillion dinars ($103 billion) was earmarked for spending, against expected revenue of 92tn dinars, leaving the government with a gaping deficit.
Iraq, which relies on sale of hydrocarbons for over 90 per cent of its revenue, has been looking to export more in order to plug this gap.
The country has also repeatedly flouted its output quota within Opec+ and has been singled out to make compensatory cuts to maintain the group's compliance levels.
Opec+ can be expected to add "another 500,000 bpd" in February as Brent trades above $50 per barrel, said Giovanni Staunovo, commodity analyst at UBS.
"Russia has already indicated that they support a further production increase. Obviously there will be pressure to select a more cautious policy with ongoing risks due to the pandemic impacting negatively the oil demand recovery, but Russia has indicated the preference to prevent a too early return of investment and production activity in non-Opec+ country while the group holds elevated spare capacity itself," he added.
Opec+ will have to tread cautiously to accommodate interests, such as that of the UAE, Opec's third largest producer, which has been vocal about lack of compliance by certain members. The UAE had pushed for stricter compliance and increasing production gradually as Opec+ had previously indicated during its historic April 2020 agreement.
"What they're going to do is ... to eventually commit to the 2m bpd deal," said Stephen Innes, chief global market strategist at Axi.
"But it's just going to be stretched over a couple of months. The next production increase is going to be very critical," he added.