OPINION: Opec is optimistic about the near-term future of the oil markets. The new production-quota agreement its members and allied producers hammered out last week presumes that demand for crude will come barreling back strongly in 2021.
The upbeat message masks the cartel’s own internal stresses, however.
A deal to increase oil output by 500,000 barrels per day in January proved much harder to seal than expected.
The ministerial meeting was meant to be held on 30 November but was postponed until 3 December as arguments raged.
The final agreement required a compromise from Opec+ — an alliance with Opec that includes key producers, led by Russia — under which the group would assemble again in a month to review progress.
Iraq, Nigeria and the United Arab Emirates are said to have pressed for the organisation to let the foot off the brake of restraint much more substantially. Some argued for 2 million bpd of new production.
Why not, with global oil prices rallying over the past six weeks and Opec’s own November report predicting demand will grow by 6.2 million bpd in 2021?
Uncertainties loom over oil market
The Brent crude price has risen by a third to nearly $50 per barrel on news of vaccines being available to tackle the Covid-19 pandemic.
But some analysts fear it is too early to tell how effective those treatments will be, how soon they can be wheeled out, and how quickly economies can recover.
Then there are oil supply side-issues which could upset the oil price, such as the strong build-up of crude from Libya, quota-busting by Opec members and whether US President-elect Joe Biden could end sanctions on Iran after he takes office in late January.
Many Opec members' economies are heavily dependent on oil revenues and have suffered from the low oil prices since the crash began in February.
The organisation expects oil demand to end 2020 down 9.8 million bpd, so Opec's forecast of a 6.2 million bpd bounceback in 2021 is highly significant.
There is also concern that allowing oil prices to rise above $50 could bring back into play the higher-cost US shale producers — a main rival to Opec.
UAE increasingly frustrated
But big new differences are also undermining the Opec machine itself – most notably between Saudi Arabia and the UAE.
Just days before the Opec+ meeting, Emirati state oil giant Abu Dhabi National Oil Company unveiled plans for $122 billion of spending to boost output.
The UAE, Opec’s third-largest producer, is chafing to increase its production as part of wider plans to turn its Murban crude into a regional benchmark.
The Emirates are becoming increasingly frustrated that Opec+ policy is seemingly being dictated by Saudi Arabia and Russia. The UAE, Iraq and Nigeria do not like their quota levels.
The UAE has already made veiled hints it might be willing to leave Opec if its needs continue to be ignored inside the cartel.
Not everyone takes this sabre-rattling seriously, but London-based think tank Chatham House has warned of trouble.
“Should the UAE assert its national economic interest and breach the production limit — or, more seriously, quit the producers alliance — it would have a major impact upon markets,” said Neil Quillam, a Chatham House associate fellow.
The UAE has already shown growing political independence with its controversial decision to restore diplomatic ties with Israel.
For now, the focus is on Covid-19, the vaccines and economic recovery. The longer-term future of oil prices might depend on Opec’s own future.
(This is an Upstream opinion article.)