OPEC+ members focus on reducing pandemic’s crude oil surplus

By Grant Smith and Salma El Wardany on 2/3/2021

(Bloomberg) --OPEC+ said it will keep pushing to quickly clear the oil surplus left behind by the pandemic, a bullish signal for prices that have already surged to a one-year high.

Ministers led by Saudi Arabia and Russia “stressed the importance of accelerating market re-balancing without delay” amid “uncertain” prospects for the global economy and oil demand on Wednesday. Crude in New York extended gains after the communique, advancing as much as 2.9% to above $56 a barrel.

The Organization of Petroleum Exporting Countries and its allies have taken a two-month pause while restoring some of the millions of barrels of crude output they halted when the coronavirus emerged to crush fuel demand last spring. Saudi Arabia is tightening supplies further this month and next with an extra cut of 1 million barrels a day.

The committee left any discussion about what to do after the two-month hiatus ends to its next full ministerial meeting in early March. OPEC+ is currently withholding just over 7 million barrels of daily output, or roughly 7% of global supplies.

The online meeting of the Joint Ministerial Monitoring Committee was unusually smooth and brief for an OPEC+ gathering, lasting just over an hour. When the 23-nation coalition met last month, ministerial talks spilled into two days and were marred by discord over how far to constrict supplies.

Extra Cutback

Saudi Energy Minister Prince Abdulaziz bin Salman had sprung the kingdom’s extra million-barrel cutback onto a mostly unsuspecting market, and against the counsel of his Russian counterpart, Alexander Novak. WTI has risen about 17% since then.

While Riyadh has often pushed for measures that would support prices -- and thus help cover government spending -- Moscow takes a different view, fearing that high prices will provoke a flood of supplies from rivals like U.S. shale drillers.

But in the communique endorsed by ministers on Wednesday, OPEC+ members seemed closely aligned on the merits of keeping a tight leash on supplies. The additional Saudi curb was “noted” by the committee, “with gratitude.”

The group’s internal data showed their strategy will continue to succeed. Bloated oil inventories in developed nations should subside back to their 2015-2019 average by August, according to a report compiled for the JMMC.

“The gradual rollout of vaccines around the world is a positive factor for the rest of the year boosting the global economy and oil demand,” according to the committee’s statement.

Lively Debate

Still, the debate could be more lively next month, when OPEC+ will need to decide whether to revive another chunk of halted output. The group is restoring supplies in increments of as much as 500,000 barrels a day each month.

The committee’s statement urged members to remain “vigilant and flexible.”

The JMMC’s leaders once again pressed members who haven’t fully implemented the cuts they promised -- such as Iraq -- to make good on their commitments, delegates said. Reeling from an economic crisis, Iraq often flouted its mandated production limits last year in order to shore up government revenue.

The country repeated its readiness to compensate for earlier overproduction, according to a statement released by OPEC after the meeting. Kazakhstan, which has also regularly breached its limits, issued a similar pledge.

Baghdad had often said it will meet its commitments, and pledged a sharp reduction in January to finally atone for breaching its output limit. However, export data showed it once again failed to do so.

To improve lagging compliance in several African members, OPEC+ appointed Nigerian Oil Minister Timipre Sylva as a special envoy, according to a separate statement. Sylva will liaise with Congo, Equatorial Guinea, Gabon and South Sudan to discuss improving their implementation, and compensating for previous misses.

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