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OPEC+ Facing Dilemma as Global Economies Spring Back into Action

June 2, 2021

A year after cutting unprecedented volumes of crude, the OPEC+ alliance is expecting world oil markets to get extremely tight.

Led by Saudi Arabia and Russia, OPEC believes the excess created when the coronavirus pandemic crushed businesses and fuel demand has nearly gone, and that oil stockpiles will disappear rapidly in the second half of the year as lockdowns ease and travel picks up.

That leaves the Organization of Petroleum Exporting Countries and its partners with a bit of a headache, they have a tough decision to make after their meeting yesterday: whether to pump more oil or hold back while the outlook is still so mired in uncertainty.

Keeping output steady would support the market against the twin risks of renewed virus outbreaks and a potential flood of exports from Iran if it renews a nuclear deal with the US and other world powers. But with Brent crude already up 37% this year to more than $70 a barrel, that could hurt the global economy and worsen the inflationary pressures fixating Wall Street.

At their Online meeting yesterday, ministers pressed ahead with a steady increase already scheduled for July, completing the return of a little over two million barrels a day since May. According to a historic deal struck in the depths of the oil crisis last year, the group has committed to holding supply levels from then until early 2022. But a tight market may call for the agreement to be revised.

It now seems producers have just as delicate of a task to bring back enough supply to match the swiftly rising oil demand. If markets over-tighten, a flare-up in prices could jeopardise the global economic recovery.

The oil minister of Kuwait, which is usually closely aligned with Saudi Arabia in OPEC matters, has said that energy markets will be able to absorb higher oil supplies from the group.

But the demand outlook remains beset with uncertainties, particularly in Asia. Indian energy consumption has taken a big hit as Covid-19 rages through the country. Japan and Malaysia, key consumers of OPEC’s crude, recently announced tougher measures to deal with new infections.

Iran will be another critical factor. The Islamic Republic is in talks to revive a 2015 accord that limited its atomic activities in return for US sanctions relief. Tehran is keen to conclude negotiations before it holds presidential elections on June 18.

Russian and Iranian officials involved in the nuclear talks in Vienna said on Monday there were still complications. They hinted that the negotiators may not be able to strike a deal during the current, and fifth, round of talks.

Iran said yesterday it hoped to reach an agreement by the time President Hassan Rouhani’s administration ends in August.

If Washington does lift sanctions, Iran may be able to ramp up exports quickly. 

OPEC’s Mr Barkindo said that Iran’s production comeback would be “orderly and transparent” and would not upset the stability of the oil market.

 

 

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