OPEC Plus “Cuts” Deal to Boost Supply

OPEC Plus “Cuts” Deal to Boost Supply

OPEC and its “plus” allies have reached another covid-induced agreement, but this time it will not be more production cuts. For the second time since the covid pandemic began, the OPEC plus members will be reversing the reductions and beginning to increase production. The increases are scheduled over time, will begin in August 2021, and the agreement bounds the countries together through 2022.

Saudi Arabia and UAE recently clashed over old production cut numbers and new increases. The conflict stalled a deal out earlier this month and grew cause for concern for the White House as gas prices climbed and no deal was able to be struck. The new deal is certain to please not only the OPEC+ members, but also the White House. It will unravel the previous agreements to production declines and gradually bring online 1.63 million barrels per day, in addition to 4 million bpd already in play.[1] The increases are as follows:

UAE – 3.168M to 3.5M bpd

Saudi – 11M to 11.5M bpd

Russia – 11M to 11.5M bpd

Kuwait – Increase 150,000 bpd

Iraq – Increase of 150,000 bpd

The covid cuts totaled over 9.5 million bpd and to date OPEC+ has turned back on some 5.5 million bpd, including the new deal. While the oil markets have reacted with pull backs from 2.5-year highs, many experts believe we can still expect to see a tight oil market. Brent and WTI both fell off about 5% to $73 and $71, respectively on Friday in anticipation of an imminent deal, but the overall picture still shows a tight market with expectations of $80 crude. The increases will be gradual through 2021 and into December 2022, but OPEC expects demand to rise by 6.3% (2.7 million bpd) in 2021 and 3.3 million bpd in its 2022 forecasts, which totals 99.9 million bpd, essentially pre pandemic levels. The demand will simply outweigh the production increases in the near term thus causing sustained oil prices and less chaotic market conditions.[2]

Key takeaways from the new agreement moving forward were abundant. The agreement begins a road to re-establishing OPEC+’s credibility and their ability to remain disciplined. It allows for them to renegotiate production outputs monthly, maneuver around covid variants, and remain flexible with its members. Algeria and Nigeria could be baseline increases later and if/when Iran reaches a nuclear deal with the Western world the new deal accommodates an anticipated 1.5 million bpd of Iranian supply. Lastly, it shows that there is plenty of supply left in the tank for the OPEC+ members to turn production back on quickly to meet the oil demand of a fossil fuels driven society at record rates. For more on the OPEC+ agreement and how it could impact the commodities markets consult your Guttman sales representative.

[1] https://www.wsj.com/articles/opec-countries-plan-to-meet-to-push-oil-output-increase-11626604843

[2] https://www.wsj.com/articles/opec-countries-plan-to-meet-to-push-oil-output-increase-11626604843

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