OPEC+ tensions rising ahead of new talks
Oil consumption is showing no signs of recovery contrary to optimistic forecasts of the first half of the year. Thus, OPEC+ may need to revise the group’s production one more time to avoid another drop in prices. Meanwhile, Russia and Saudi Arabia are again holding different views as they did in March.
We may see another showdown between oil producers before the end of the year, as heavyweights Saudi Arabia and Russia are holding different views on how to approach the halting recovery in oil demand, considers Bloomberg’s Oil Strategist Julian Lee. Although oil consumption was supposed to start recovering in autumn, it seems to continue falling due to renewed restrictions on travel and social gatherings across Europe along with a decrease in state support for companies. Reduced trade, weakened economies and the knock-on effects of business closings and job losses are the biggest obstacles to oil demand, reads a report by Standard Chartered analysts, which names Thailand to be the only country that’s close to seeing a V-shaped recovery in oil demand.
The International Energy Agency (IEA) and the Organization of Petroleum Exporting Countries (OPEC) continue cutting their forecasts for 2020. In the past two months, the IEA has reduced its forecast for 2020 oil demand by 400,000 bpd, while OPEC has cut its projections by 500,000 bpd. According to IEA’s Head of Oil Industry and Markets Division Neil Atkinson, the agency is “more likely to make a downgrade than an upgrade” in its next monthly report.
Meanwhile, OPEC+ is beginning to contemplate the next easing of limits on their output. In May, the alliance cut production by record 9,7 million bpd, but only after a long dispute, as Russia wanted to preserve the status quo and Saudi Arabia insisted on deeper output cuts. The disagreement sparked a price war that helped push oil prices below $20 per barrel.
Now, the situation inside OPEC+ is still uncertain. Although overall compliance with the agreed cuts has been unusually good, several countries are still lagging behind. In addition, Libya remains outside the group’s supply deal, which is creating another big source of uncertainty. On the eve of new negotiations, tensions are emerging within the group. Saudi Arabia’s main objective is to prevent oil prices from a further drop, and the country’s Minister of Energy Abdulaziz bin Salman wants the alliance to be “proactive and preemptive” to prevent supply from running ahead of demand. Russia is more cautious, with its energy officials trying to avoid repeatedly revising the long-term agreement. The latter envisages adding 2 million bpd to the group’s aggregate production from the beginning of January 2021, and Russia’s Minister of Energy Alexander Novak prefers to wait as long as possible before making a decision to change it.
Meanwhile, the world’s biggest oil traders differ in their views on the outlook for oil. Co-founder and CEO of Mercuria Energy Group Marco Durnand says “we do not need the extra oil” that the OPEC+ group is planning to pump from January. Executives of Trafigura share the views, while Vitol is more optimistic than its rivals.