Crude oil glut likely to overshadow any OPEC+, US policy shifts

Topics Crude Oil | Oil Prices | Oil policy

OPEC and its non-OPEC allies led by Russia are having to rethink their plans, says Paul Hickin, Platts
The oil market remains awash with crude. Potential changes in OPEC+ and US policy won't solve the industry's demand problem, while the world's key oil producers will be hard pushed to cut supply further. Only a vaccine can cure Covid-19-induced consumption ills.

Record coronavirus cases, a new wave of lockdowns across Europe and a stagnant road use trend in the US have had oil forecasters scaling back their recovery scenarios. The major European economies have seen mobility drop to its lowest since mid-June, signaling a renewed collapse in gasoline and diesel demand.

S&P Global Platts Analytics slashed its 2021 oil consumption outlook by 700,000 barrels per day (b/d) recently and now predicts oil demand growth of 5.8 million b/d in 2021, putting any revival well below pre-Covid-19 levels.

China has almost single-handedly carried oil in recent months – and is the only country expected to see year-on-year growth, albeit just 0.3% according to Platts Analytics – but there are limits to its support. Indian mobility has tentatively started to pick up but nevertheless remains extremely weak given that the country has been the second-worst hit after the US in terms of Covid-19 infections.

Vaccine hope

Progress over a vaccine has given the oil market hope but there are still as many questions: when will it be approved and when will it be available to be rolled out on a mass scale? Time ticks away and, with it, the demand recovery.

OPEC and its non-OPEC allies led by Russia are having to rethink their plans. The so-called OPEC+ producer pact meets at the end of the month and there is a growing consensus that the alliance will no longer be able to release almost 2 million b/d of crude back on to the market early next year as it had intended. The most likely scenario is a rollover of the current 7.8 million b/d production cut deal for three months but there is even chatter that OPEC+ may consider something more drastic to bolster prices.

The oil outlook has been complicated by the return of Libya, which has surpassed all expectations. The crisis-torn North African nation went from pumping less than 100,000 b/d in September to 1 million b/d in early November after a delicate truce was struck between warring political factions.

OPEC also has the added headache of compliance. If serial offender Iraq as OPEC’s second-largest oil producer continually fails to live up to its end of the bargain, it risks damaging the goodwill from all other members. Iraq upped its production to 3.79 million b/d in October, according to the latest Platts survey which, while meeting its monthly quota, does not make up for previous violations.

Biden presidency

The US oil industry has been hit hard by weak demand and low oil prices, which have obliterated around 3 million b/d in production. But ultimately the 2020 spike in exploration and production companies filing for bankruptcy and high-profile consolidations – such as Conocophillips snapping up Concho Resources and Chevron buying Noble Energy – will eventually leave the shale patch in better shape.

Risks that a Biden presidency will hurt the US fossil fuel industry are also likely overdone in the near term at least. Joe Biden, who is set to be the new US president, has vowed to make a significant policy shift to clean energy but could be hampered by an unsupportive US Senate and the task of getting Covid-19 under control and the economy back on track.

Meanwhile, US oil and gas producers may have slowed drilling to a bare minimum but operators holding federal permits have kept actively drilling wells ahead of any potential ban to build up a healthy reserve.

Biden has said he would halt issuing new federal drilling permits, meaning operators could continue to bring their drilled but uncompleted wells, or DUCs, into production. He has not promised to end drilling on federal lands completely or impose a national fracking ban. S&P Global Platts Analytics believes around 1.1 million b/d of production could be hit by 2024.

But the net result of a Biden presidency for oil may still be bearish over his time in office. New US international diplomacy could see 2 million b/d of sanctions-hit Iranian barrels returning to the market at some point.

That said, there remain huge challenges in brokering a new deal, especially given elections in the OPEC member next year and the risk of hardliners returning to power. Platts Analytics doesn’t see more than 750,000 b/d of additional crude from Iran before 2022.

While there is sure to be a reduction of the oil glut next year, net importers – such as China and India – should find they will still be spoilt for choice at reasonable prices. As demand picks up, OPEC+ members will be itching to turn on the oil spigots. Platts Analytics doesn’t see prices going beyond $50/b by the end of 2021 after hovering close to $40/b for the past few months.

The old oil market adage is that the cure for low oil prices is low oil prices. Whether these low prices can trigger demand this time around has its doubters.

One thing is more certain: the world’s biggest suppliers – the US, Russia and Saudi Arabia – will be very much the support act, with the oil demand recovery saga the only show in town.



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