Tighter Times Ahead For The Oil Market

Saudi Energy Ministry, Prince Abdulaziz bin Salman Al-Saud, Minister of Energy of Saudi Arabia, chairs a virtual summit of the Group of 20 energy ministers to coordinate a response to plummeting oil prices

OPEC+ to continue with cuts

This year has seen OPEC+ taking extraordinary action to try and stabilize the oil market.

The unprecedented fall in oil demand this year, and in particular over 2Q20, left the market drowning in supply. In April, we saw OPEC+ members putting aside differences and agreeing on historic record production cuts as a result of COVID-19. The group agreed to cut output by 9.7MMbbls/d over May and June, though this has been eased throughout the year, with the group currently cutting by 7.7MMbbls/d.

Under the original deal, the group was set to ease further starting in January 2021, reducing the level of cuts to 5.8MMbbls/d, which would then be in place until April 2022. However, with the demand recovery this year taking longer than initially expected, coupled with a surge in Libyan supply, the group has been forced to revisit this plan, given the risk that easing too much at the beginning of 2021 could push the market back into surplus.

After a tough week of meetings in early December, OPEC+ finally agreed to ease output less than originally planned. Therefore, from January 2021, the group will ease cuts by 500Mbbls/d, leaving the level of cuts at 7.2MMbbls/d. From there, OPEC+ will assess the market on a monthly basis and decide whether to ease further. Under the revised deal, the group will ease by a maximum of 500Mbbls/d per month.

While taking this approach may be more appropriate than the expected three-month rollover of current cuts given the uncertainties around the demand outlook, it does create more uncertainty around what OPEC+ may decide each month, and so the potential for increased volatility in the first few months of 2021.

We believe that the changes the group made to the deal will be enough to ensure that the market does not return to surplus in 1Q21. While for the remainder of the year, we would expect the market to continue drawing down stocks.

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