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Oil plunged on OPEC+ gradual production hikes and COVID mutant spikes; what’s next?

calendar 20/07/2021 - 19:01 UTC

Oil (WTI-Sep) closed around 66.42 Monday, plunged almost -6.63% on OPEC+ gradual production hikes and COVID mutant spikes. Oil made a low around 65.63 for the 1st time since late May as OPEC+ agreed to raise output and as the delta Covid variant clouded the outlook on fuel demand recovery. After days of squabbling amid opposition from the UAE, OPEC+ decided to increase crude production by +0.400 mbpd monthly from Aug’21 till Dec’21; the cumulative hike will be +2.00 mbpd.

The OPEC+ also agreed on new production allocations for several members from May 2022, including the UAE, Saudi Arabia, Russia, Kuwait, and Iraq. On top of that, rising coronavirus cases could lead to new restrictions and hit oil demand, prompting investors to unwound long positions after a massive rally that drove prices to an almost three-year high of $77 a barrel earlier this month. According to secondary sources, total OPEC-13 crude oil production averaged 26.03 mbpd in June’21, higher by 0.59 mbpd sequentially. Crude oil output increased mainly in Saudi Arabia, UAE, Angola, Iran and Kuwait, while production decreased primarily in Iraq, Nigeria and Gabon.

The 19th OPEC and non-OPEC Ministerial Meeting (ONOMM), held via videoconference, concluded on Sunday 18 July 2021.

The Meeting noted the ongoing strengthening of market fundamentals, with oil demand showing clear signs of improvement and OECD stocks falling, as the economic recovery continued in most parts of the world with the help of accelerating vaccination programs.

The Meeting welcomed the positive performance of Participating Countries in the Declaration of Cooperation (DoC). Overall conformity to the production adjustments was 113% in June (including Mexico), reinforcing the trend of high conformity by Participating Countries.

Because of current oil market fundamentals and the consensus on its outlook, the Meeting resolved to:

Reaffirm the Framework of the Declaration of Cooperation, signed on 10 December 2016 and further endorsed in subsequent meetings, including on 12 April 2020.

Extend the decision of the 10th OPEC and non-OPEC Ministerial Meeting (April 2020) until the 31st of December 2022.

Adjust upward their overall production by 0.4 mb/d on a monthly basis starting August 2021 until phasing out the 5.8 mb/d production adjustment, and in December 2021 assess market developments and Participating Countries’ performance.

Continue to adhere to the mechanism to hold monthly OPEC and non-OPEC Ministerial Meetings for the entire duration of the Declaration of Cooperation, to assess market conditions and decide on production level adjustments for the following month, endeavoring to end production adjustments by the end of September 2022, subject to market conditions.

Adjust effective 1st of May 2022, the baseline for the calculations of the production adjustments according to the attached table:

Reiterate the critical importance of adhering to full conformity and taking advantage of the extension of the compensation period until the end of September 2021. Compensation plans should be submitted in accordance with the statement of the 15th OPEC and non-OPEC Ministerial Meeting.

The latest OPEC+ deal allows OPEC and its allies to hike productions by +0.400 mbpd from Aug’21, amounting to a +2.00 mbpd cumulative hikes Dec’21. The deal also extends the OPEC+ supply management pact to Dec’22 from its previous expiry of Apr’22. The nominal production cut would be -3.75 mbpd by Dec’21 and by Dec’22, there may not be any OPEC+ production caps. 

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Reference base production hike from May’22:

UAE: +0.332 mbpd; Saudi Arabia: +0.500 mbpd; Russia: +0.500 mbpd; Iraq: +0.150 mbpd; and Kuwait: +0.150 mbpd, totaling +1.632 mbpd. These extra volumes next year come in addition to the Saudis planning to withdraw their additional voluntary cuts of 0.400 mbpd subject to confirmatory compensation cuts by other producers. Whilst both Saudi and the UAE had been supportive of an immediate output boost, the UAE had objected to the Saudi idea to extend the production cut pact to Dec’22 without getting a higher production quota. Thus to overcome the disagreement, OPEC+ agreed on new output quotas for several members from May’22, including the UAE, Saudi Arabia, Russia, Kuwait and Iraq as per their available production capacity.

As per OPEC’s estimates average global oil demand for 2021 should be around 96.55 mbpd against supply 90.25 mbpd; i.e. a supply deficient of around -6.30 mbpd. Thus even if OPEC+ discontinues the production cut agreement completely it will keep oil in a rebalancing position. But considering emerging COVID mutant disruptions, lower vaccinations rate in most of the world, and a possible hike in Iran supplies (JCPOA deal), as a precautionary measure OPEC+ will continue to gradually hike its production levels as per real data/situation on the ground.

Bottom line:

If there is no significant lockdown effect for COVID mutants, oil should be elevated in the coming days. For example, after the COVID tsunami in Q1CY21 in India, now the economy/country is running almost 90% normal and oil demand should be at least 75% of normal demand, if not 95%. The big factor will be now Europe, which consumes almost 13 mbpd on average and is under COVID mutants threat.

Technical View: Oil (WTI-Sep)

Technically, whatever may be the narrative, oil now has to sustain over 65.00-64.00 for any meaningful rebound; otherwise, expect more correction.

 

 

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