You’d be forgiven for thinking that it’s smooth sailing ahead for the OPEC+ oil producer group.
The 23 members concluded their recent meeting in less than an hour, agreeing to raise output again in October. There were no signs of the tensions that had marred earlier gatherings, just a quick rubber-stamping of the next step in a deal thrashed out in July, which sees the group adding 400,000 barrels a day to supply each month.
But the easy days are numbered. The group’s own analysis of the oil market next year suggests there are still challenges to overcome. Producers, who are finally seeing the benefit of the sacrifices they made last year, may have to forgo future output increases, and perhaps even reimpose cuts, if they are to prevent stockpiles from rising again.
The current OPEC+ output deal sees the group increasing supply each month until they have put back all the production they took off the market in 2020. That would take them until September 2022 to achieve, assuming there are no bumps on the road.
But bumps there will almost certainly be — and possibly big ones.
The group’s analysts see the policy running into trouble at the start of 2022, or even earlier, if a resurgence of the coronavirus hits demand in the final quarter of this year. They presented oil ministers with two forecasts of the oil market ahead of the meeting on Sept. 1. The most optimistic of those sees global oil demand averaging 99.9 million barrels a day next year, within a whisker of the pre-pandemic peak of 100 million barrels.
Even with that full recovery of demand, the analysts see the supply-demand balance returning to a surplus of oil if the producer group continues boosting output as currently planned. The stock builds are even bigger in the more pessimistic alternative scenario, which sees demand almost 2 million barrels a day lower.
Saudi Energy Minister Prince Abdulaziz Bin Salman identified a target for the group of getting commercial oil inventories in the developed economies of the Organization for Economic Cooperation and Development back down to their average 2015-2019 level. That’s a goal they reached in April, if you measure the stockpiles in simple volume terms.
Even if you look at them in terms of the number of days’ worth of oil demand they represent, which is perhaps a more useful measure, they were close, just 1.5 days above the prince’s target by the end of July, down from 17 days in March 2020.
Either way, the producers have done a remarkable job so far at re-balancing the oil market. And their success has helped producers elsewhere. U.S. crude output has increased by 500,000 barrels a day since June, with drillers finally responding to higher oil prices, and is now at its highest level since May 2020.
But the OPEC+ group faces a real challenge in the months ahead from needing to reduce supply just as many members are itching to open their oil taps some more.
Even in the base case forecast, the current policy of adding to supply each month would return OECD commercial stockpiles almost to their pandemic peak of 3.2 billion barrels, enough to meet more than 31 days of projected end-2022 demand.
Of course, the group may not be able to add all the production it plans. Several members — most notably Angola and Nigeria — are already struggling to pump as much as they are permitted and further increases may be impossible. Even the largest non-OPEC producer, Russia, could struggle to boost output in line with its rising target by the middle of next year.
That will reduce the size of the group’s problem, but won’t remove it altogether.
Unless oil demand turns out much stronger, or production outside the OPEC+ group much weaker than OPEC’s analysts predict, the time will soon come when the members will again have to contemplate cutting, rather than raising, output. When that happens, expect the old (and new) divisions to emerge again and the meetings to go back to being long and difficult.
Julian Lee is an oil strategist for Bloomberg.
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