OPEC+ unlikely to be swayed from long-term strategy

OPEC+, the oil producers’ alliance led by Saudi Arabia and Russia, meets this week for the first test of the new regime put in place at July’s meeting, and which took effect from the first of this month.

Despite some background noise and no lack of newsworthy events in August, the smart money is on a “steady as she goes” approach to the gradual unwinding of the dramatic cuts, which have rebalanced global markets and led to steadily rising prices for the past year.

Of course, there have been some ups and downs in that period, notably in the first weeks of this month, when the effects of the delta variant of COVID-19 seemed set to constrain economic activity in the US and Asia, and hence depress demand for the rest of the year.

The virus is always capable of throwing a big spanner in the works of projections, especially when they may be trending toward the over-optimistic. But it seems that markets, as evidenced by last week’s 11 percent surge in Brent prices, are taking a long-term view that the vaccine will win out in the end. The chances of another round of widespread lockdowns in any of the big global economies are slim.

Demand forecasts have been gyrating, especially from the International Energy Agency, but the consistent trend is upward. The experts are really only debating how much demand will rise.

COVID-19-driven price fluctuations will no doubt continue, perhaps at an increasingly infrequent rate, but the market fundamentals look remarkably stable. Inventories continue to be steadily drawn down, while the US rig count — which some experts thought would begin to rise significantly by now in a period of $70 plus prices — is hardly changed.

Into this mix, there have been thrown some variables. The Ida hurricane — rapidly approaching the coast of Louisiana — is the most immediate, and will have an effect on production and refining capacity in the affected regions, which could include Saudi Aramco’s big Motiva refinery in Texas.

But the US industry has got hurricane recovery down to a pretty refined skill, and can be expected to bounce back efficiently from any enforced shutdowns.

The possibility of the US Federal Reserve putting the brakes on economic stimulus and thereby affecting oil demand was swerved at last weekend’s Jackson Hole meeting, where US policymakers made clear that they are keen to maintain the steady pace of post-pandemic normalization.

Saudi Energy Minister Prince Abdul Aziz bin Salman has made clear his admiration for the month-by-month policy scrutiny of the US Federal Reserve and other central banks. The monthly regime at OPEC+ was designed to mirror that careful mix of financial scrutiny and fine-tuning in the oil markets, and it has to be said that it worked perfectly over the past year.

The July meeting, which was billed by some sensationalists as a confrontation between OPEC+ members driven by different visions of the oil-producing future, in fact delivered the best example yet of the new found cohesion and purpose within the 23-member organization.

The formula that was worked out then allows those members who want to increase capacity — and have the ability to do so — to raise output in a controlled and disciplined way until the end of the agreement in 2022.

The outcome of the July agreement was a carefully thought through program for the management of the global oil industry through to the end of 2022. At the current rate, pre-pandemic output levels will be achieved by September next year, but the agreement runs until the end of 2022, offering built-in flexibility in the case of unforeseen circumstances.