OPEC+ Holds Both the Knife and the Cake

OPEC+ holds both the knife and the cake in the oil market, especially as the group boasts the lion’s share of the remaining unused supply capacity in the world.

That’s what Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said in a statement sent to Rigzone following the latest OPEC+ meeting, which reconfirmed the group’s production adjustment plan and a decision to add 400,000 barrels per day to the market in November.

“The supply capacity control makes OPEC+ the only market player than can significantly redirect market conditions, apart from any unplanned outages or weather phenomena, justifying the extended bullish reaction after the meeting’s outcome became clear,” Tonhaugen said in the statement.

The outcome of the OPEC+ meeting was no surprise, Tonhaugen noted, but when prices are at above $80 per barrel, this is a level that makes customers uncomfortable and producers happy but cautious, the Rystad representative added.

“Most markets participants were expecting OPEC+ to stick to the plan but - amid high prices and a tight supply environment – it appears traders have been cautious, pricing in an element of surprise before the meeting,” Tonhaugen said.

“The decision by OPEC+ to add the expected 400,000 barrels per day in November triggered a market reaction, as traders are now more boldly coming out from their cautious positions and pricing in a confirmed, tighter supply market,” he added.

It’s not that OPEC+ does not recognize the coming supply shortage, Tonhaugen said, adding that the group is well aware of the global inventory draws, maintenance work and rising demand but chose to wait until later this year to adopt a bolder supply approach.

“With prices now sitting comfortably at high levels without the threat of extra OPEC+ supply - other than the planned one - we are entering a period when demand needs closer monitoring,” Tonhaugen said.

“The recovery of the economy, the potential of a cold winter and fuel switching from gas to oil in Asia suggest a rather quick demand increase to as much as 100 million barrels per day in December, but if prices keep on rising, the elasticity of oil demand may kick in as consumers, out of cost reasons, cut consumption,” he added.

“Producing nations, and namely OPEC+, have to be careful not to allow prices to inflate too much, otherwise we may see an adverse reaction that could negatively impact post-pandemic economic growth,” Tonhaugen continued.

In a separate statement sent to Rigzone on Monday prior to the OPEC+ meeting, Rystad’s senior oil markets analyst Louise Dickson outlined that the company expected that OPEC+ would stick to its plan to marginally bring back 400,000 barrels per day on a monthly basis and wait until December to make any larger market disruptions.

The 21st OPEC and non-OPEC ministerial meeting, which was held via videoconference, concluded on October 4. The meeting reiterated the “critical importance” of adhering to full conformity, OPEC highlighted. OPEC+’s 22nd OPEC and non-OPEC ministerial meeting is currently scheduled to be held on November 4.

To contact the author, email andreas.exarheas@rigzone.com