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OPEC+ finally reached a production cut agreement after so many days of internal disagreement. Following the agreement, the group in statement reassured the consuming public of it continued commitment to a stable market, the interest of producing nations, the efficient, economic and secure supply to consumers, and a fair return on invested capital.
A slight adjusted was made to the agreement that has been in place since April this year. The adjustment was to the effect that instead of holding the production cut at 7.7 million barrels per day, there would be a reduction in this volume that is being held back. Now, additional 500,000 barrels would be pushed into the market.
“In light of the current oil market fundamentals and the outlook for 2021, the group has agreed to reconfirm the existing commitment under the DOC decision to gradually return 2 million bpd to the market. Members have decided to voluntarily adjust January production by 0.5 million bpd from 7.7 million bpd to 7.2 million bpd.”
In addition to this, the group agreed that there would monthly meetings which would begin from January 2021 to assess market conditions and decide on further production adjustments for the following month, with further monthly adjustments being no larger than 0.5 million bpd.
Read also: COVID-19 crashed global oil market, this is how super majors are riding out the storm
As expected the decision by the group is a welcome development to those stakeholders such as “media and speculators” who sees the move as a sign of stability.
Optimism about oil prices and a global economic recovery has grown, with a multitude of future oil price graphics spreading like wildfire on the internet according to Oilprice.com “Oil markets are relieved that OPEC+ will continue to cooperate and the group maintains the ability to move markets”.
Some market observers, however, see this situation differently, as they remain skeptical because of the eventual cooperation by members of the group only came after days of dissent. Continuing optimism about a possible oil market recovery in H1 2021 is said to be largely based on the wishful thinking of OPEC leaders, such as Saudi Arabia, and an irrational view on the positive effects of COVID vaccines on the global economy.
The economic effects of a global vaccination scheme, which will likely take 6-18 months due to logistics, financial restraints and political strategies, are going to be minimal in the short term. OECD markets are unlikely to recover in H1 2021, as the availability of the vaccine is going to be a major issue. At the same time, OPEC+ seems to misunderstand that OECD economies are on life-support, it is only financial support mechanisms that are keeping these countries afloat. In 2021 most of these financial injections or QE mechanisms will be put on ice, as debt levels are reaching disastrous levels. A major economic downturn should be expected, and such a downturn would have a direct effect on oil and gas demand.
At the same time, the market is still struggling with an extremely high oil storage level, which has only partially decreased due to high refinery runs. When looking at the demand for petroleum products, however, there is an imminent threat of a storage build-up.
As some analysts have rightly indicated, the current oil price increase has nothing to do with OPEC+ strategies and decision-making but instead is based on the (mis-) perception of investors, traders and speculators that the COVID-19 vaccine will be hitting the market and driving a major recovery. This wishful thinking appears to have infiltrated OPEC leadership as well, with the cartel’s statements likely to turn into self-fulfilling prophecies of deceit and defeat.
Even more worrying is the fact that internal OPEC dissent is growing, as the organization aims to get to grips with the distress in the market. For several key powers inside or linked to OPEC, the media success story is one-sided and does not reflect the facts on the ground.
For almost all OPEC+ members, especially Saudi Arabia, the UAE, and Russia, the agreement has become a double-edged sword. Being the market stabilizer and swing producer has not brought the rewards that the group hoped for. Government budgets have been hit, the burden of cuts is not being equally divided, and multiple participants are increasingly unwilling to comply anymore.
