Opec+ decision surprises markets
The Organization of Petroleum Exporting Countries and its key allies decided at a meeting on Monday to stick to planned gradual increases in output for November despite market expectations that the alliance would further boost production in order to dampen soaring crude prices.
A statement released after the brief videoconference meeting of the Opec+ alliance said that participants had agreed to stick to the schedule agreed in July, namely to “adjust upward the monthly overall production by 0.4 million bpd (barrels per day) for the month of November 2021”.
Markets have been sent surging further by Monday’s decision, with prices for the benchmark WTI contract reaching $78.38 and Brent contracts trading at $82, the highest levels since November 2014 and October 2018 respectively.
The 23 countries in the group, led by Saudi Arabia and Russia, took under an hour to reach the decision after the meeting started shortly.
Their statement issued after the meeting said the decision had been taken in light of “current oil market fundamentals”.
While higher prices benefit producers in the form of increased revenues — particularly after the lean period of the coronavirus pandemic — but there are medium-term drawbacks if rising prices stifle the fragile post-pandemic economic recovery and thus demand for oil.
The trend could also entice new competitors into the market or even encourage the shift towards renewables.
US President Joe Biden’s administration urged increased output in August, when National Security Advisor Jake Sullivan said the cartel was not doing “enough” to boost oil production.
In a study published last week, Morgan Stanley analysts noted the possibility of “demand destruction” if oil prices creep over $80 a barrel.
In the current market, Goldman Sachs sees Brent crude oil soaring towards $90 within months.
But even if Opec+ members had wanted to open the taps further, there had been question marks over their ability to do so.
Perhaps the more important question is whether Opec+ will even be able to meet these less ambitious targets agreed in July, according to Kieran Clancy, analyst at Capital Economics.
“Opec managed less than half of its planned increase in production in August (the latest available data), largely due to disruptions to operations in Angola and Nigeria,” he pointed out.
Tamas Varga, an analyst at PVM Oil Associates, said: “Delayed maintenance works and lack of investment, partly due to the health crisis and partly because of the transition from fossil fuel to renewable energy, are to blame for these failures.”
Contrary to the normal Opec trend of countries exceeding their production quotas, in recent months most member states have stuck to them or in some cases even fallen short.
This suggests that the group may not be able to rapidly increase production in the short term despite it having a current theoretical reserve of five million bpd in the ground.
The Opec+ alliance said that their next meeting would be on Nov 4.