By Adedapo Adesanya
The move by the Organisation of the Petroleum Exporting Countries and allies (OPEC+) to raise production limits by 400,000 barrels per day monthly from this month will leave the oil market in deficit at the end of 2021, research analysts at Merrill Lynch have said.
The analysts, Karen Kostanian and Ekaterina Smyk, noted that the move by the 23-member alliance was positive for oil in both the short and medium-term as a change in baseline production levels does not mean an immediate 1.6 million barrels per day hike from April 2022 and will mostly redistribute quotas within OPEC+.
“Production quotas may be adjusted on the way, while baseline production changes signal a general commitment from the key member.
“Production quotas may be adjusted on the way, while baseline production changes signal a general commitment from the key members,” they said.
Business Post had reported that last month, after a brief stalemate between Saudi Arabia and the United Arab Emirates (UAE), the members agreed to raise the output limit imposed on five countries, by phasing out 5.8 million barrels per day of oil production cuts by September 2022.
The analysts allayed concerns that oil prices would run into some turbulence post the latest OPEC+ agreement as the market feared upcoming supply hikes and importantly the select members potentially flooding the market in 2022 with cumulative 1.6 million barrels per day additions to baseline production levels.
Last week, oil settled lower with the Brent crude recording more than 7 per cent drop and the United States West Texas Intermediate (WTI) falling more than 5 per cent amid fears that the faster-spreading Delta variant would slow fuel demand in China and the rest of Asia.
Most oil market experts also believe that the OPEC deal last month, marking the end of a gridlock, will help cool prices which have climbed to 2-1/2year highs as the global economy recovers from the coronavirus pandemic.
As part of the latest agreement, Russia should be able to add 100,000 barrels per day each month starting from August (its 25 per cent share of OPEC+ quota) and its baseline production level will be increased from April 2022 by 500,000 barrels per day to 11.5 million barrels per day for crude only.
“First, the reversal of 500,000 barrels per day by the end of 2021 means oil production (crude + condensate) could reach almost 11 million barrels per day, just 3.0 per cent below pre-Covid levels.
“Should OPEC+ continue to add 400,000 barrels per day per month in Q1, Russia essentially would be allowed to fully restore production by the end of Q1 2022.
“Second, the baseline crude production of 11.5 million per day practically means that Russia would have to produce roughly 1 million barrels per day above its historical maximum,” Merrill Lynch analysts said.
“We hence believe that Russia is highly unlikely to reach its baseline levels on a 1 – 2 year horizon considering flat CAPEX levels over the past couple of years. The next big growth project is not expected to come online before the mid-2020s,” they said.
Bloomberg survey for OPEC production shows that the group increased crude production by 400,000 barrels per day month on month in July as part of the OPEC agreement to reverse 1.15 million barrels per day of the cuts through May-July.
Saudi Arabia led an increase adding close to 500 barrels per day which were offset by small declines in production across other producers while Iranian production was almost flat in July as it added 30,000 barrels per day.
Dipo Olowookere