OPEC + sees tight oil market as ministers prepare for supply talks

A year after shutting down unprecedented crude volumes, the OPEC + alliance expects global oil markets to become extremely tight.

The Saudi-Russian-led coalition believes that the glut created during the pandemic has all but disappeared and that oil stocks will decline rapidly in the second half of the year as lockdowns ease and displacement accelerates.

That leaves the Organization of the Petroleum Exporting Countries and its partners with a decision they will start thinking about as early as Tuesday: whether to pour more oil into the market in the second half of the year, when the outlook is still so mired in uncertainty.

Keeping production stable would support the market against the double risk of new virus outbreaks and a potential export flood from Iran, another OPEC member. But with Brent futures nearing $ 70 a barrel, it could also jeopardize the global economy and fuel the inflationary pressures that are fixing Wall Street.

“There are many moving elements when it comes to factors affecting the global oil market, such as the pace of change during the pandemic,” OPEC Secretary General Mohammad Barkindo said on Monday after preliminary consultations. .

At their Tuesday meeting, ministers are expected to move forward with a gradual increase already slated for July, completing the return of 2 million barrels since May. In theory, according to a landmark agreement reached in the depths of the oil crisis last year, the group has pledged to stay at this level until early 2022. But a tight market could require a review of the agreement.

Delegates said initial discussions would begin on Tuesday on the alliance’s measures after July. No decision will be made, they said. But any clues ministers give will be scrutinized – by inflation forecasters as much as by oil traders.

OPEC’s Joint Technical Committee estimated on Monday that by the end of July, stocks in developed countries will be below average levels seen in 2015-19 – a key benchmark for the group. Between September and December, stocks will be depleted at a sustained rate of over 2 million barrels per day.

This prompts many observers to believe that OPEC + will have to turn on the taps in the second half of the year.

“The market now faces the exact opposite dilemma of April 2020,” said Louise Dickson, analyst at Rystad Energy Consultants.

“Producers now have an equally delicate task as bringing in sufficient supply to meet the rapidly increasing demand for oil,” Dickson said. “If markets tighten excessively, a surge in prices could jeopardize the global economic recovery.”

But the outlook for demand remains uncertain. India’s energy demand takes a hard hit as COVID-19 rages across the country. Japan and Malaysia, OPEC’s main consumers of crude, recently announced tougher measures to deal with the latest infections.

“The resurgence of COVID-19 cases in some countries in Asia and Latin America remains a source of concern and could further dampen economic activity and a rebound in oil demand,” the JTC said in its report.

A critical factor in the group’s decision-making will be Iran.

Tehran is in talks with world powers to revive a 2015 nuclear deal that limited its atomic activities in exchange for easing US sanctions. Iran wants to reach an agreement before the presidential elections are held on June 18. If that happens and Washington lifts the sanctions, Iran may be able to quickly increase its exports.

Iran’s oil minister said on Monday that the country could increase crude production quickly, and analysts estimate production could reach around 4 million barrels per day.

OPEC’s Barkindo signaled at the JTC meeting that Iran’s return “will occur in an orderly and transparent manner,” causing no upheaval to the stability that other OPEC + countries have struggled to achieve. .

As ministers assess the risks of bringing more oil back to market, the debate may well reopen old fault lines in the coalition leadership.

Riyadh and Moscow have often differed over how quickly to step up production, with the kingdom generally advocating restraint and Russia more eager to increase sales volumes. The United Arab Emirates, another key player, has also shown its willingness to resume exports.

“It’s still a delicate balancing act,” said Bill Farren-Price, director of research firm Enverus and a seasoned cartel observer.

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