By Salma El Wardany, Dina Khrennikova, Javier Blas and Grant Smith On 4-12-2020
(Bloomberg) – After five days of difficult talks that revealed new rifts between core members, OPEC + agreed to gently reduce production cuts next year. The deal seemed to satisfy the oil market and most cartel members, but put pressure on the unity of the group and allowed test times.
Saudi Energy Minister Prince Abdulaziz bin Salman, de facto leader of the group alongside his Russian counterpart, was frankly saying the deal was hard to win.
Saudi Energy Minister Abdulaziz bin Salman
“It’s very unbearable, it’s very exhausting,” Prince Abdulaziz told reporters after Thursday’s meeting. “If you want to work with 23 countries, you have to be very sympathetic to the idea of flexibility.”
Despite all his talk of fatigue, the prince had just signed an even more sloppy schedule of meetings between the Organization of Petroleum Exporting Countries and its allies that will set the trajectory of crude oil prices for the coming months.
After a rift broke out between Saudi Arabia and the United Arab Emirates, the cartel could not agree on what was widely expected for this week: a complete three-month delay before the planned production increase in January. Instead, the ministers decided to add 500,000 barrels per day of production to the market next month and then hold monthly meetings to decide on next steps.
The deal could add up to 2 million barrels per day to the market, but ministers could also decide to reduce production again if necessary, Russian Deputy Prime Minister Alexander Novak said. The maximum change in a month is 500,000 barrels per day in both directions.
After this week’s lengthy negotiations, it isn’t “the nightmare scenario the market feared, but it’s not what it really expected weeks ago,” said Paola Rodriguez-Masiu, senior analyst at Rystad Energy AS. “The fact that February production levels are still under discussion will bring more uncertainty for the upcoming OPEC + meetings.”
Responding to uncertainty
The revised deal isn’t as compelling as many OPEC watchers expected, but it could be a rational response to the huge uncertainty in the energy markets.
OPEC + is only just emerging from a period of historic turbulence. Earlier this year, it saved the oil market from an unprecedented slump, cutting production by 9.7 million barrels a day as the pandemic drove demand down.
The cartel brought back to the market 2 million barrels of that output per day in August without a hitch and would add a similar volume next month. Still, several members of the group were concerned that the market was still too fragile to accommodate those extra barrels.
While a breakthrough in vaccines to tackle the coronavirus caused a surge in oil prices, a resurgence in infections has sparked another wave of lockdowns and delivered another blow to fuel economy. The cartel and the wider industry have revised their 2021 outlook downwards, with a strongly polarized picture between recovery in Asia and stagnation in Europe.
January’s output increase, which is only a quarter of what would have happened under the previous OPEC + deal, is likely to keep the oil market in deficit during the first quarter, according to Bloomberg calculations based on OPEC data. That means that inflated fuel stocks weighing on prices will continue to decline.
“These 0.5 million barrels per day will be absorbed into the market absolutely very easily,” said Amrita Sen, co-founder of consultant Energy Aspects Ltd., in an interview with Bloomberg TV Friday. “This really ensures that there will be no oversupply in the market in the first quarter.”
Brent oil was up 2.1% to $ 49.72 as of 8:07 am in London, a nine-month high.
Had the group continued with the full increase in supply, the cartel economists would have calculated that the market would have turned into surplus, potentially undermining the recent price recovery.
“It’s a wise decision,” Iranian Oil Minister Bijan Namdar Zanganeh told state news agency Shana after talks concluded. “These monthly meetings can help maintain stability in the market,” and the additional stocks coming in January won’t have a major impact, he said.
The flexibility afforded by a monthly cycle of high stakes ministerial meetings may be desirable, but the process to get there appears to be less so.
“There was a lot of drama at this meeting and tensions were running high,” said Sen.
The intensity of a fight earlier this week between Saudi Arabia and the United Arab Emirates surprised OPEC viewers. The pair have long been staunch allies, but Abu Dhabi has a more independent oil policy. It is investing heavily in new production capacity, wants to pump more oil and finds its current quota unfair. It even indicated last month that it is considering its options outside the club.
On Monday, differences between the two countries prevented the cartel from reaching a clear agreement, forcing them to postpone the scheduled meeting with OPEC + allies by two days.
In an apparent gesture of frustration, the Saudi energy minister told the group he can step down as co-chair. His UAE counterpart, Suhail Al Mazrouei, was offered the post but declined, according to a person familiar with the situation. Ultimately, OPEC + asked Prince Abdulaziz to stay.
In his closing remark after Thursday’s meeting, the prince chose to highlight the episode. “It’s very frustrating at times, which is why I threw in the towel two to three days ago,” he said. “But the towel comes back to me.”
Several analysts predicted more problems in 2021.
“Relations between Saudi Arabia and the UAE remain vigilant,” said Ed Morse, chief commodity research at Citigroup Inc. “The UAE is likely to become more independent and influential in group affairs in the future.”