The September meeting of OPEC+ today wasn’t expected to erupt in vehement disagreements. Unlike the last meeting, when a rift between Saudi Arabia and the UAE caused worry that the cartel was on the verge of a breakdown, now, members of the oil-producing group seem to be in general agreement on the next steps.
But the outcome of the meeting is no less important for the oil market.
Last month, President Joe Biden, in stark contrast to his energy transition agenda, called on OPEC to boost production by more than the agreed 400,000 bpd monthly to mitigate the effect of rebounding fuel demand on prices at the pump. Said prices had started to get uncomfortable for the White House given next year's midterm elections, so the energy transition agenda was temporarily forgotten.
This is when OPEC clearly demonstrated how tight its control of oil markets had become. Sources from OPEC at the time told media that the cartel was discussing Biden's plea but had not made a decision on it. Close to a month has passed since then, and there has been no more talk about a boost in production.
Instead, the group hinted at a further supply tightening.
Just this week, the oil minister of Kuwait, Mohammad Abdulatif al-Fares, told Reuters that the group might curb supply again amid a slowing market, blaming the potential curbs on the fourth wave of Covid-19 infections.
"The markets are slowing. Since COVID-19 has begun its fourth wave in some areas, we must be careful and reconsider this increase. There may be a halt to the 400,000 (bpd) increase," the official said, giving new hope to oil bulls and reasserting the status of the cartel as the ultimate price-swinger.
But the meeting today didn’t yield any noteworthy surprises as the group, after a very rapid meeting, decided to go ahead with the already planned 400,000 bpd increase. Sources also suggested that most OPEC+ members are happy with Brent crude prices around $70 per barrel.Seemingly, a lot has changed since early July.
Saudi Arabia and the UAE settled their differences; the UAE won the right to raise its baseline from which production is being cut. Iraq is boosting exports in accordance with the 400,000-bpd monthly addition to OPEC+ supply, of which 253,000 bpd is coming from OPEC. Iran is too busy at home to start an OPEC fight with the Saudis.
Yet even without surprises, OPEC+ could see to it that oil prices rise further. Yesterday, Reuters quoted unnamed sources from the cartel as saying they expected the current oil deficit to linger until the end of this year and only disappear in May 2022. The deficit in question, according to a report by the OPEC+ joint technical committee, would be about 900,000 bpd, which would next year turn into a surplus of 1.6 million bpd as OPEC+ continues to bring back production.
This, interestingly, was a revision of an earlier forecast for an oil market surplus of 2.5 million bpd that would have pressured prices considerably. Now, it appears that despite the worry around the fourth wave of Covid-19 infections, OPEC is more upbeat about the short-term prospects of oil demand.
Oil demand this year, according to the cartel, should rise by close to 6 million bpd, slowing down next year to about 3.3 million bpd. It is probably this slowdown that will push the market into a surplus. And in anticipation of this surplus, OPEC+ is very unlikely to help the Biden administration cut U.S. gasoline prices.
This price rise, by the way, may not be the result of tighter oil supply, Baker Institute energy transitions fellow Peter Volkmar argues in a recent analysis. Volkmar attributed the gas price rise that is making the administration nervous to the strong rebound in oil demand and also to rising inflation.
U.S. GDP is booming thanks to government stimulus, so it only makes sense that inflation will also boom, and no inflation worth its salt neglects gas prices. In other words, what is happening in the U.S. right now with prices at the pump is only natural, and OPEC+ is rather irrelevant in that regard.
OPEC+ has already restored about 45 percent of the oil production that it cut at the start of the pandemic. At today's meeting, the cartel will likely stick to its plan to add another 400,000 bpd to combined output every month until May 2022, when it will have returned to pre-pandemic production levels.
Maybe some event will interfere with these plans. Maybe China will be hit by another wave of Covid-19, and its economy will suffer. Maybe the energy transition push will accelerate suddenly and oil demand will slump under the weight of millions of EVs, as unlikely as this is to happen inside a few months. And, of course, there is always geopolitics to add its own swing to oil prices.
No one should know better than OPEC+ just how uncertain oil markets have become recently. And no one should want to curb this uncertainty more, as evidenced by the strict adherence—occasionally forced—to the massive production cuts the extended cartel agreed last year. It is for this reason that, despite internal disagreements and differences of opinion that have made headlines and moved prices ahead of its monthly meetings, OPEC+ has so far always ended up sticking together for the greater good.