Although the OPEC+ group’s decision last week to increase crude oil production by approximately 500,000 barrels per day (bpd) every month starting from January is contrary to market expectations, it will keep oil prices in a range between $40 and $50 in the first quarter of 2021, experts said Wednesday.
After a two-day postponement of meetings due to production rate differences between member countries, the Organization of Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, approved an incremental increase of 500,000 barrels per day (bpd) from January 2021 to balance oil markets struggling with a supply glut and weak demand. The market expectation was an extension of the current production cuts of 7.7 million bpd.
According to the new deal, the total production cut will be brought down to 7.2 million bpd in January. The group will then meet monthly to assess market conditions and decide on further production adjustments for the following month, which will be capped at 500,000 bpd.
Robert McNally, the founder and president of RapidanEnergy, told Anadolu Agency that OPEC+ would avoid an inventory build in the first quarter of next year.
McNally said to do so, would mean that the group “should support crude oil prices in the mid-to-high $40 range.”
Energy market analyst of Price Futures Group, Phil Flynn said the OPEC+ decision of gradually raising oil output “will help solidify an oil price bottom.”
He said compared to the group’s overall reductions, the additional barrels next year are small amid tightening global supply due to lack of investment.
“Oil is in a new era as capital expenditure cuts are severe,” he said.
Tolga Uysal, an energy markets specialist and founding partner of Deriva Consulting, said even if a viable vaccine is soon available, its positive effect on oil demand would only be seen after the first quarter of 2021, or maybe after the first half of 2021, based on hopes that world economies will shortly recover.
“This uncertainty may keep the oil prices in the $40-50 range for a while, however, the markets may see the $50-60 range after the first quarter of 2021,” Uysal said, adding that last year’s level of $65 a barrel is unlikely in 2021 or even in 2022.
Splits among OPEC members clearer
Despite the agreement reached between the parties at the OPEC+ group meeting, Uysal said the meeting revealed differences between member countries.
“The disagreement between Saudi Arabia and countries such as the United Arab Emirates (UAE) and Russia, which are in favor of reducing or terminating the production cuts, may suppress oil prices in the coming months. While the UAE’s enthusiasm to take the lead within OPEC was clear during the meetings, reports that Saudi Arabia wants to leave the OPEC co-chairmanship confirms this argument,” Uysal said.
He also drew attention to the UAE’s move to increase its investments in the oil sector in the next five years, while many oil-producing countries have been trying to divest their investments away from oil.
Uysal recalled that although a consensus was reached on production cuts among OPEC+ countries, questions remain over the compliance problems of some countries with the agreement, Uysal said.
“In general the new levels of output cuts are close to the previously planned cuts, however, the main question here is how countries such as Russia, the UAE and Iraq will compensate for their overproduction,” he said.
The rapid increase in oil production in Libya, the new era of US-Iran relations after Joe Biden won the November presidential elections in the US, the energy companies’ switch to renewable energy investments and the increase in the number of oil rigs in the US may exert downward pressure on oil prices, he said.
“The increasing number of cases in the COVID-19 pandemic and the fresh containment measures in the US will negatively affect oil demand. The increasing oil stocks in the country is a clear indicator of it,” Uysal said.
He noted that storage capacity in Cushing, one of the most important storage centers in the country, has reached 82%. He explained that this level was seen in March when the pandemic-related crisis deeply hit the oil market, and he contended that such a level would restrict the upward movement of prices.
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