Market Overview

OPEC faces ‘worst of both worlds’ with oil prices in limbo ahead of committee meeting

OPEC is facing “the worst of both worlds” with the current oil market demand outlook, S&P Global Platts’ head of EMEA news said Wednesday ahead of the group’s Joint Ministerial Monitoring Committee (JMMC), where it will announce recommendations for production policy along with its non-OPEC allies.

While the figure is expected to mark the largest one-year jump ever recorded, it’s significantly below the already lukewarm demand figure of 99.8 million bpd recorded at the end of 2019, pre-coronavirus. And it’s a dire forecast for producers who have invested billions of dollars in boosting production capacity. For OPEC, that’s significant spare capacity that will be left untapped.

International benchmark Brent crude has hovered in the $40-$45 per barrel range for the last five weeks, signalling a substantial recovery from its multi-decade trough of around $19 per barrel in March brought on by global coronavirus lockdowns and a Saudi-Russia oil price war. But the commodity still remains in correction territory, down more than 30% year-to-date and at a level Critchlow says paints a “bleak picture” for the alliance.

Not only that — it’s also just enough for some U.S. shale operations to survive, he said, providing some oxygen to OPEC’s American competitors. The higher the prices, the greater relief for shale.

On the other hand, extending the historic production cuts of 9.7 million bpd that the OPEC and non-OPEC alliance began in May could be seen as self-defeating, pushing prices too high and derailing the fragile demand recovery of the past several weeks.

With oil prices shifting to what MUFG sees as cyclical tightening, “current spot prices are at levels that could prove self-defeating to the market rebalancing, which in conjunction with the large inventory overhang, creates a real test for OPEC’s current strategy,” Khoman told CNBC.

It’s also important to remember that there is much more downside risk to OPEC’s 2021 demand forecast of 97.7 million bpd than upside. The projection is predicated on everything going right — the virus being contained, stimulus measures continuing, no disruptive trade wars.

Paola Rodriguez-Masiu, a senior oil markets analyst at Rystad, wrote Wednesday: “For now, we believe that the oil market is heading to the right direction, with oil prices registering moderate gains.”

But, she cautioned, “the price recovery is fragile and hinges not only upon avoiding a derailing of the demand recovery, but also OPEC+ adherence to quotas as they slowly ramp-up output in August.”

OPEC faces ‘worst of both worlds’ with oil prices in limbo ahead of committee meeting, CNBC, Jul 15

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