OPEC+ AGREE TO PUMP MORE OIL IN 2021

Originally published in IR Insider in December 2020 (IR Insider page archived)

Prince Abdulaziz bin Salman Al-Saud, the Saudi Arabian Minister of Energy, in April this year

Photo: Saudi Press Agency / Reuters via cnbc.com

Leaders from the Organization of Petroleum Exporting Countries (OPEC) and the Russian Federation were set to discuss oil production quotas for January 2021 on Monday, Nov. 30. Earlier this year, as states worldwide entered national lockdowns, due to COVID-19, the OPEC+ alliance agreed to cut oil production by approximately 10% of the global output. Producers assumed that Monday’s meeting would extend the existing agreement by 3 months.

However, the states were divided in their opinion about whether an extension was warranted. This caused a two-day delay in the discussion, and finally, on Dec. 3, members of the alliance decided to increase production by 0.5 million barrels per day (b/d) starting Jan. 1, 2021.

This March, demand for oil fell due to national lockdowns and travel bans, and consequently, the price of oil plummeted to an 18 year low: $22 a barrel, compared to the pre-pandemic $60-$70 a barrel. To counter the fall in demand, OPEC+ decided to limit supply by 9.7 million b/d. However, the United Arab Emirates (UAE), Russia, Nigeria, Kazakhstan, and Iraq violated this pact by producing over the set quota. After being criticized for the violation, the UAE reduced production further to compensate for the transgression.

Then, in August, OPEC loosened the previously stated restrictions, bringing oil production back up to 2 million b/d. However, when Europe and the United States were hit with a second wave of COVID-19, the oil market suffered again. Thus, stakeholders in the oil industry are expected to keep their expectations for production low in the upcoming year.

Yet, OPEC+ countries struggled to agree that production limits were necessary at the start of the new year; Saudi Energy Minister Prince Abdulaziz bin Salman Al-Saud even threatened to resign out of frustration (specifically with leaders from the UAE). Recently, the UAE has been seeking greater control over their own energy policy as it sees OPEC quotas as restrictively low. Therefore, alongside Kazakhstan and Russia, it resisted an extension of the current production quotas.

It is noteworthy that Saudi Arabia and Russia were in a price war that saturated the oil market in March, and economists believe that with a presently diminished demand for oil, a similar oversupply can be expected if countries produce even slightly over the newly set limit. Regardless of overproduction, they predict a continuation of the current oil market deficit. Algerian Energy Minister Abdelmadjid Attar also agreed that the current market conditions are likely to extend to the first quarter of 2021.

Nevertheless, recent news about the Pfizer/BioNTech COVID-19 vaccine could transform the situation. The vaccine could enable travel and reduce the necessity for lockdown-like measures, thus leading to increased if not more normalized economic activity. This would facilitate an upturn in the oil market. The vaccine could be the light at the end of the tunnel after a long, grueling year of socio-economic uncertainty.