While a deal struck on Thursday by Opec and allied oil producers would maintain the vast majority of their existing production cuts through January, key Middle Eastern oil producers Saudi Aramco and Abu Dhabi National Oil Company (Adnoc) are expected to remain cautious on large-scale capacity expansion projects and greenfield oil-based investments, project observers said.

The deal by Opec, Russia and the other producers known as the Opec+ group will increase Opec+ production by 500,000 barrels per day in January, but the small size of the output rise is seen as helping to keep a floor under oil prices in the weeks ahead, analysts said.

Oil prices are expected to remain steady moving into 2021, but uncertainly still hangs over a longer-term outlook for oil demand that depends on a global anti-coronavirus vaccination campaign.

Meanwhile, key Middle Eastern producers are likely to remain cautious about major expansion and greenfield oil projects until demand recovers handsomely, project observers said.

Impact on investments

Saudi Arabia, which has supported curtailing oil supplies in support of higher oil prices, could further delay billions of dollars’ worth of offshore capacity enhancement projects, as the coronavirus outbreak continues to cripple oil demand in key regions worldwide.

“We believe that the mega incremental programmes in Saudi Arabia, including Zuluf and Marjan could continue to face further delays, as the kingdom might not spend on offshore capacity enhancement projects during the short-term,” one person said.

The United Arab Emirates, on the other hand, has been frustrated with the steep cuts in oil production since the spring Opec+ agreement, which has left almost half of its oil production capacity idle, industry observers said.

“Unlike Saudi Arabia, UAE wants to increase its oil production, and it has expressed its discontent within the Opec group on many occasions,” a second person said.

Abu Dhabi, the oil-rich emirate within the UAE, has ambitious plans to ramp up its oil production capacity to 5 million bpd by 2030, which requires billions of dollars’ worth of investments.

Abu Dhabi’s Supreme Petroleum Council recently approved Adnoc’s huge capital expenditure budgets of 448 billion dirhams ($122 billion) from 2021 to 2025.

However, project watchers have cautioned that Abu Dhabi would continue to delay large oilfield expansion projects, including the long-term development plans of its Upper Zakum and Lower Zakum and the Belbazem project, until there’s more clarity on its production ramp-up plans.

In recent years, Abu Dhabi has aggressively expanded its oil-production concession agreements and awarded multiple oil and gas exploration deals, with the aim of expanding its oil-production capacity.

The emirate also fears that by restricting its production capacity drastically, it could risk some of its key oil assets, which could get stranded, if they are not developed in the coming years.

Market reaction to small output boost

While oil prices increased recently on the view that Opec+ would extend existing cuts until at least March, some analysts suggested the deal to lift production by a relatively small amount from January could still restrict oversupply in the market.

“Ultimately, the agreement may not be the three-month delay consensus was expecting, but still helps prevent an oversupplied first quarter 2021 and helps support our $51 per barrel oil price in 2021 and further increases thereafter,” Bernstein Research said in a note on Thursday.

“Opec is once again signalling that managing supply and therefore prices for the benefit of producers and consumers remains very high on their agenda.”

The Opec+ group agreed on Thursday to add 500,000 barrels per day back onto the market in January, putting the group's output cut at 7.2 million bpd next month, compared with current cuts totalling 7.7 million bpd that are likely to last until the end of the year.

Paola Rodriguez Masiu, a senior oil markets analyst with Norway’s Rystad Energy, said an incremental production of “500,000 bpd from January is not the nightmare scenario that the market feared, but it is not what it really expected weeks ago”.

“Markets are now reacting positively and prices are recording a small increase, as 500,000 (bpd) of extra supply is not deadly for balances,” she added in a late Thursday note.

Masiu observed that “by only agreeing upon January’s production levels, the alliance now has some time to see if vaccinations will ease the oil demand destruction and speed up the recovery”.

A gradual ramp up in production by Opec+ could cause a price decline, but “in front of a no-deal, a small increase is not bad news after all”, she said.

However, Opec+ emerging from Thursday's meeting without a long-term deal, and instead planning to hold monthly reviews of production levels, could infuse volatility in oil prices from February if the coronavirus situation remains grim, analysts suggested.

“The compromise agreement, if continued through February and March by adding 0.5 million bpd to each of these months on top of the previous month’s increase, leads to an oversupply of 1.6 million bpd for Q1 2021," Wood Mackenzie vice president Ann-Louise Hittle said on Friday in a note.

Opec+ now faces the “tricky task of reconsidering production at meetings each month during Q1 2021 and avoiding similar disagreements over compliance and production,” which could lead to some volatility in oil prices, she said.

Wood Mackenzie, however, has modest expectations for oil prices in the short term.

“We expect Brent to hold a floor near $40 per barrel in January and average at least $45 per barrel for the month with this agreement,” Hittle said.

However, she agreed that the compromise worked out by the Opec+ group “reflects a determination to avoid a repeat of the price war in March and April this year”.

The West Texas Intermediate US crude benchmark had plunged into negative territory for the first time in history in April, triggered by the price war between Saudi Arabia and Russia that threatened to wreck the oil markets.