Opec, allies face seismic demand split; plan to extend output cuts

Topics OPEC | oil output | crude oil supply

With European nations easing lockdowns in the run-up to Christmas, demand is likely to recover further.
As Opec+ ministers gather virtually this week, the city that traditionally hosts their meetings will be locked down. Vienna’s Christmas markets will be closed, the famous Ringstrasse boulevard silent. For oil ministers, the scene should urge caution.


But while the Austrian capital provides a dramatic example of how the second wave of the pandemic is shutting down economies in Europe and the US, the global picture is more nuanced.


In Asia, the situation is almost the opposite to that of Vienna. The streets in India were full during the recent celebration of Diwali; China’s Golden Week holiday saw millions take cars, trains and even planes to visit relatives across the country.


The east-west divide is an added conundrum for Opec+, which on November 30-December 1 needs to decide whether to delay a production increase slated for January —and if so, for how long. And there’s another crucial divide in the global oil market: While gasoline and diesel demand have recovered to about 90 per cent of their normal level, consumption of jet fuel languishes at about 50 per cent.


“The size of the shock and the unevenness of its impacts imply a recovery process which is far from smooth,” said Bassam Fattouh, the head of the Oxford Institute for Energy Studies.


In private, Opec+ delegates talk about the imbalance in the recovery, both geographically and between refined products. Increasingly too, they talk about another segmentation: crude oil quality. The market for the denser more sulfurous crude, called heavy-sour, is tight, mostly because of production cuts from Saudi Arabia, Russia, and other big producers. But the market for so-called light-sweet is glutted, in part because Libyan barrels have come back to the market after a ceasefire, and European refiners are consuming less North Sea crude.


All those factors make the deliberations of Opec+ ministers trickier. And they have just one blunt tool at their disposal: raising or cutting overall production. Opec+ nations do not target gasoline or jet-fuel production, but just crude.


There’s also a geographical handicap: Most of their oil goes to Asia, where demand is strong, rather than Europe and America, where it’s weaker. That means they can do little to address the glut where it matters. Even the quality is a problem: Opec pumps mostly heavy-sour crude, and can do relatively little to trim the excess of light-sweet crude.


There is some consolation. While the recovery in oil demand that started in May stuttered in October and November as the second wave took hold, it wasn’t the same hit to the market as earlier this year. The lockdowns in Europe aren’t as severe as the first wave, and demand in Asia is surging — not just in China, but also in India, Japan and South Korea.


High frequency data for road usage shows a decline in early November of about 30 per cent from pre-Covid levels, compared to nearly 70 per cent in late March and early April, according to an index compiled by Bloomberg News. The most recent data suggests that road fuel demand bottomed out around November 15, and has been recovering since. With European nations easing lockdowns in the run-up to Christmas, demand is likely to recover further.


Pieced together, this all means the market isn’t as bad as it looked just a few weeks ago.

Iraq says it won’t seek exemption from Opec+ deal

Iraq will not ask Opec for exemption from a pact aimed at reducing output, and oil prices are expected to reach about $50 at the beginning of 2021, the al-Sabah state newspaper cited the oil minister as saying in a report on Sunday. The minister said the commitment of members to the deal would help boost oil prices.


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