Opec+ to convene amid robust recovery in global oil prices

Opec+ is set to convene on Thursday for an extraordinary ministerial meeting that will be a bellwether of the recovery in oil markets.

Opec+ will hold an extraordinary ministerial meeting on Thursday as oil prices continue to recover nearly a year after they hit a historic low.

Prices now are 25 per cent higher from a year ago, with Brent and West Texas Intermediate receiving a significant boost from persistent commodity supercycles.

The alliance, led by Saudi Arabia and Russia, successfully managed to limit production and support a broader recovery last year after prices fell sharply when Covid-19 began to spread around the world.

Opec+ members set aside their differences and reversed a significant supply increase by agreeing to cut 9.7 million barrels per day from markets between May and July.

The pact was upheld and restrictions loosened to accommodate incremental increases due to improving demand as countries eased their lockdowns.

The group is currently cutting 7.2 million bpd, equal to about 7 per cent of global supply.

Opec+ deferred a planned output increase of 2 million bpd in January as it responded to renewed lockdowns during the December holiday season.

Saudi Arabia, the biggest exporter, voluntarily cut production by 1 million bpd until March while Russia and Kazakhstan were allowed to make small output increases.

Now with oil above $60 a barrel after gaining more than 17 per cent over the past month, the group may have to consider raising supply to offset higher prices that could encourage higher-cost producers to resume operations.

“I expect a slight reduction in production cut targets to assuage the Russians and Iraqis, but Opec+ is likely to remain content to keep Brent prices around $65 a barrel,” said Jeffrey Halley, senior market analyst for the Asia-Pacific region at Oanda.

Brent, which accounts for two thirds of the world’s traded oil, was trading at $63.75 a barrel at 9.00pm in the UAE yesterday while US crude benchmark WTI was at $60.78 a barrel.

Abu Dhabi Commercial Bank's chief economist Monica Malik said Opec+ could raise production by 500,000 barrels to 750,00 barrels a day, compared with official targets set for February and March.

“The reduction in inventories and expected demand pickup due to the vaccination programmes provide fundamental space to increase output," she said.

"A further strengthening in the oil price could dampen the global recovery trajectory.”

More than 241 million doses have been administered in 103 countries, at a rate of about 6.73 million shots a day, according to Bloomberg's Covid-19 vaccine tracker.

However, tomorrow's extraordinary ministerial meeting, which Iran will attend as observer, is expected to have some disagreements.

“We anticipate there will be division between producers favouring increasing output and those wanting to see the market continue to run hot, particularly Saudi Arabia,” said Shady Elborno, head of macro strategy at Emirates NBD.

Analysts are also betting on crude’s long-term bullishness, with prices projected to hit $75 a barrel by the third quarter, according to Goldman Sachs. Others expect oil to rise as high as $100 a barrel.

However, Edward Bell, a senior economist at Emirates NBD, was more cautious about the prospects of Brent rising by triple-digit figures due to the availability of adequate spare capacity.

“Taken all together, Opec, Russia and the US have more than 12 million bpd of capacity that could return should either policy or prices prove accommodative,” he said yesterday.

Strong growth in demand from China, the world’s second-largest economy, and vaccination campaigns in developed countries have supported prices.

Signs of a recovery in demand centres such as India have also lifted sentiment. The South Asian economy reversed a steep contraction to grow by 0.4 per cent in the third quarter.

On Monday, Baker Hughes chief executive Lorenzo Simonelli said that the energy industry had begun to recover. He was speaking at CeraWeek, an important event for the global energy industry that is taking place this week.

“As you look at supply and demand equation, we are seeing that there will be a recovery in 2021, with an even more balanced market going into 2022,” he said.

Mr Simonelli said hydrocarbons were still expected to play a crucial role in meeting the world's energy needs, especially in the short run.

“There are still over 1 billion without access to ongoing energy, and energy will be vital in the future. So, we have to address energy transition but also affordable energy being available for people.”