The global economy is in a nearly flawless condition, one might observe after last week’s performance in the financial markets. Major stock indices have reached for new highs. The MSCI Global Equity Index settled at a fresh record peak and so did the S&P 500 index, which gained 1.7% over last week. Friday was especially upbeat because of the US job data. The eagerly awaited June non-farm payroll report showed that the US economy added 850,000 jobs last month against a forecast of 720,000 after rising 583,000 the previous month whilst unemployment ticked up from 5.8% to 5.9%. It was probably the ideal reading that implies continuous recovery at a heathy pace but the unemployment figure close to 6% would not justify altering the course of the ongoing stimulus programmes. Accordingly, US Treasury bond yields fell as fears of inflation eased.
Perceived positive economic outlook paints an upbeat picture on oil demand growth and on inventories. This was confirmed by the weekly report from the EIA on US oil stocks. Commercial oil inventories declined largely due to the hefty drawdown in crude oil stocks. Consumption keeps climbing and is now flirting with the 21 mbpd mark. There is room for further improvement as the summer travel season is now in full swing. The US oil landscape is a good proxy of the OECD and global oil balance, and the underlying confidence was reflected in the weekly closing price levels. The two main crude oil benchmarks settled more than 1% higher on the week and CME products fared even better.
The above developments, as significant and important as they were, have been dwarfed by the latest virtual get-together of energy ministers from the OPEC+ alliance. The producer group, in recent days, has started to look similar to organizations like the European Union where decision making can be bureaucratic and the objection of one country that goes against the will of the rest can raise significant hurdles that takes time and efforts to overcome. What Hungary or Poland are to the EU is the UAE to OPEC+. For the second time now the Persian Gulf member country opposed to the proposed output deal and consequently the latest meeting will reconvene this afternoon.
As unexpected as the UAE’s stance seems, when scratching the surface and going into details the obstacles do not seem insurmountable. Member countries broadly agreed a production increase of 400,000 bpd a month from August till December, which would amount an extra 2 mbpd of supply by the end of 2021. What the UAE objected was the rather thick string attached to this proposal. Due to the uncertainties lying ahead the group’s Joint Ministerial Monitoring Committee (JMMC) has recommended extending the agreement beyond the current expiration date of April 2022 until December of next year and this is what the UAE opposes, as reported by the WAM, the Emirates news agency.
Both views can be justified under the current circumstances. Those who support the extension of the current co-ordinated efforts to re-balance the market would argue that the potential return of Iranian barrels must be accommodated. The group’s Joint Technical Committee (JTC) has warned that the market faces significant oversupply by the end of 2022 under its base case scenario and OECD inventories can jump 181 million bbls above the 5-year average by the end of next year. OPEC will publish its 2022 projections for the first time on July 15. It will be interesting to see how next year’s estimates will compare to that of the EIA or IEA. On the other hand, the UAE unconditionally supports the proposed production increase until the end of the year but the country’s Energy Minister, Suhail Al-Mazrouei said in a Bloomberg interview yesterday that making the extension of the deal a precondition is unnecessary. He has a valid point. The current agreement has ten more months to run, and a lot can happen during this period. The US might return to the 2015 nuclear agreement leading to Iran coming back to the global oil export market. Or nuclear negotiations can break down for good. The current pandemic can be beaten by next April and demand forecast can be revised significantly higher. Or the world might struggle to contain the disease and less oil will be needed to balance the market. In case of extending the output deal beyond April 2022 the Emirates will want to renegotiate its baseline reasoning that the current one at 3.168 mbpd is too low compared to their and other country’s spare capacity. Saudi Arabia quickly rebuked the UAE proposal yesterday leading to a stand-off.
This is where the producer group stands going into today’s round of talks. As mentioned above, the disagreement, whilst obviously causing delays in reaching the next phase of the supply deal and understandably wrecking some nerves, is not something that could not be overcome. The views are clear. Every member country supports the proposed increase in output levels between August and December, but the UEA demands to raise the issue of production restraints beyond next April at a later stage. In case its wish is granted we will have a good picture as what to expect for the rest of the year.
The latest Monthly Oil Market Report puts 2H 2021 global oil demand at 99 mbpd, nearly 5 mbpd above the 1H figure. Taking into account non-OPEC supply and OPEC’s other liquids the demand for OPEC oil will stand at 28.66 mbpd in the current quarter and 29.39 mbpd in 4Q. Assuming OPEC members with no quota (Iran, Libya and Venezuela) will produce around 4.13 mbpd combined throughout this year and adding non-OPEC’s share to the OPEC column for the sake of simplicity 3Q will see a global stock draw of 1.1 mbpd, which will moderate to around 630,000 bpd in 4Q. Further stock depletion and stable prices are guaranteed. This would be our base case scenario, which will be quickly altered in case of escalation of internal friction within the OPEC+ group.