On July 1, OPEC+ oil ministers discussed the next phase of production reduction plans at their monthly meeting. Currently, Russia and Kazakhstan are interested in increasing production, while Saudi Arabia and its Gulf allies prefer a more cautious approach. This meeting will have a major impact on OPEC+’s production policy and oil price trends.
It is reported that at the OPEC ministers meeting earlier that day, all parties focused on discussing this plan: from August to December this year, increase production by 40% per month. million barrels per day, a cumulative increase of 2 million barrels per day in supply. However, it is unclear how much support this plan has.
Before the ministerial meeting, OPEC+ was originally scheduled to hold the Joint Ministerial Monitoring Committee (JMMC) meeting on June 30. However, at the suggestion of Russian Deputy Prime Minister Alexander Novak, the JMMC was postponed by one day and held on the same day as the ministerial meeting. The move was intended to give Saudi Arabia and Russia more time to reach a consensus.
According to the original production increase agreement, OPEC+ will increase crude oil supply to the market by 2.1 million barrels per day from May to July, accounting for approximately 2% of global crude oil production, as a part of the plan to relax production restrictions.
But with oil prices soaring to their highest levels since 2018, Russia is actively pushing OPEC+ to relax production cuts. On June 30, Kazakhstan’s Energy Minister Nuurlan Nogaev also echoed Moscow’s position and expressed support for a “cautious increase” in OPEC+ oil production.
Although OPEC+ is considering scaling back production cuts, crude oil prices continue to rise due to the promising demand outlook and the deadlock in Iran’s nuclear negotiations. At 20:05 on July 1, Beijing time, WTI crude oil futures rose by 3.17% during the day to US$75.80 per barrel, while Brent crude oil futures rose by more than 2.47% to US$76.46 per barrel.
OPEC is optimistic about demand recovery in the second half of the year
On the eve of this meeting, OPEC+ took a relatively optimistic view on the prospects for improving market conditions and fuel demand growth.
OPEC Secretary-General Barkindo said on June 29 that oil demand is expected to increase by 6 million barrels per day this year, of which 5 million barrels will recover in the second half of 2021.
Dai Jiaquan, director of the Petroleum Market Research Institute of China Petroleum Economics and Technology Research Institute, pointed out in an interview with reporters that currently, world oil demand is recovering rapidly and will increase significantly in the third quarter. 3.1 million barrels per day, reaching 97.4% of the same period in 2019. In the fourth quarter, it further increased by 1.3 million barrels per day, reaching 98.7% of the pre-epidemic level.
Dai Jiaquan pointed out that as oil prices rise, OPEC+ has a need to increase production. “Looking now, OPEC+ is more optimistic about demand growth in the second half of the year. Coupled with the high oil prices, internal members are asking for more production increases. But it is not expected to increase significantly. It is not in the fundamental interest to bring oil prices down again. Russia’s increase in production The demand is stronger than Saudi Arabia.”
FXTM market analyst Chen Zhonghan believes that overall, the global crude oil market will continue to be in a state of insufficient supply, which will support oil prices effect. According to OPEC+’s estimate in May, the supply-demand gap in August is about 1.9 million barrels per day. Therefore, even if OPEC+ increases production by 500,000 barrels per day in August, supply will still not be enough to meet growing demand.
“With this outlook, the downside for oil prices looks limited, and bulls are placing their hope on unexpected good news. If OPEC+ announces a smaller-than-expected increase in production, oil prices are expected to advance further US$80/barrel is an important psychological level.” Chen Zhonghan said.
Crude oil supply may be surplus by the end of 2022
On June 29, the OPEC+ Joint Technical Committee (JTC) issued a “major uncertainty” warning, suggesting that there may be risks of imbalance in the international oil market after April 2022, and it is expected that by the end of 2022 There will be a surplus of crude oil supply.
At the JTC meeting, representatives discussed three supply and demand scenarios: a base scenario, a low demand scenario, and an additional supply scenario. All three scenarios show that OECD commercial inventories of crude oil will be below the five-year average level from 2015 to 2019 in the third quarter of this year as supply exceeds demand. Two of the scenarios also show crude oil commercial inventories remaining below the five-year average in the fourth quarter of this year.
But as supply increases, the situation will change suddenly in 2022.
All three scenarios show that OECD crude oil commercial inventories are above the 2015-19 average in the second half of next year. Under the baseline scenario, OECD crude oil commercial inventories will be 181 million barrels higher than the 2015-2019 average in the fourth quarter of next year, while under the low demand scenario they will be 577 million barrels higher.
For the additional supply scenario, the assumption of the JTC meeting is that Iran and the six countries on the Iranian nuclear issue reach an agreement to enable the United States to lift sanctions on Iran’s oil exports. Previously, OPEC+ did not consider this possibility when making forecasts.
It is reported that some OPEC members are concerned about the forecast of oil surplus next year. This may prompt OPEC+ to consider extending its overall production reduction agreement beyond April 2022.
However, it is unclear how much support such an initiative would have, especially given that Russia is more eager to lift production restrictions. Sources said that although Saudi Arabia and Russia have differences on production reduction policies, neither side wants a repeat of last year’s price war.
JTC���The report shows that in the 13 months from May 2020 to May 2021, Russia’s actual production exceeded its prescribed quota by an average of 85,000 barrels per day. But unlike other “substandard” countries, Russia has not been required to make additional production cuts to make up for excess production quotas.
Oil prices will peak at $70 in the summer and then fall back
“No one in OPEC+ is talking about lowering oil prices. OPEC+ is not supplying more crude oil to the market to lower prices.” Victor Shum, vice president of energy at IHS Markit, was interviewed by reporters Shi said, “If you want to increase supply, you need to profit from higher prices and maintain or compete for market share.”
Cen Guowei pointed out that currently, Brent and WTI prices are above $70/barrel, at their highest levels since 2018.
There are two factors behind this: on the one hand, rapidly growing world oil demand is a key catalyst for prices to rise more than 40% since the beginning of the year, but on the other hand, OPEC+ production cuts The agreement has also contributed a lot. Since this year, about 8 million to 9 million barrels per day of production have been taken away from the market.
As for the impact of Iranian crude oil returning to the market, Cen Guowei believes that even if the United States agrees to lift sanctions on Iran, it is expected to be done in stages rather than all at once. “This means that Iranian oil supplies won’t just ‘bang’ onto the market in a surge. Of course, a surge cannot be completely ruled out until the terms of the deal, if any, are clear.”
“We expect oil prices to peak at US$70 in the summer and then fall back to more than US$60. We believe that additional supply, including Iranian oil, will prevent the market from overheating.” Cen Guowei said.
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