OPEC+ agrees to increase output after tense negotiations …Higher prices likely in Q1 over Iraq’s commitment
Tense negotiations and rumours of a rift between Saudi Arabia and UAE ended with a compromise deal for OPEC+ on 3 December 2020. Despite concerns on oversupply for Q1 2021, the group agreed to increase output by 500,000 b/d in January. Production restraint is set at minus 7.2 million b/d instead of the Q4 2020 level of minus 7.7 million b/d.
Meanwhile, Iraq is committed to all OPEC+ production cut agreements that help contain the volatility in oil prices because OPEC’s second largest oil producer seeks higher prices for its crude exports, the country’s oil minister said Dec. 6.
Wood Mackenzie vice president Ann-Louise Hittle said: “After the initial OPEC session on 30 November, without its non-OPEC partners, signs of discord pointed to doom for the concept of a simple rollover of current levels of production restraint of 7.7 million b/d. Under the April OPEC+ agreement, that restraint was due to ease to a 5.8 million b/d cut on 1 January 2021.
“During November, the idea of delaying that easing in production restraint took hold. This reflected widespread concerns that weaker-than-expected global demand would lead to a large oversupply in the first quarter, unless OPEC+ held back from the nearly 2 million b/d planned increase.”
The OPEC+ Joint Ministerial Monitoring Committee (JMMC) will meet in January to consider if the 500,000 b/d cut in restraint should be continued for February, or possibly doubled.
Hittle said: “This week’s compromise reflects a determination to avoid a repeat of the price war in March and April this year.
“The compromise agreement, if continued through February and March by adding 0.5 million b/d to each of these months on top of the previous month’s increase, leads to an oversupply of 1.6 million b/d for Q1 2021.
“We expect Brent to hold a floor near US$40 per barrel in January and average at least US$45 per barrel for the month with this agreement.”
Ihsan Ismaael said in an oil ministry statement that oil prices are expected to rise in the first quarter 2021 but cautioned about their current trajectory.
Iraq has failed to stick to its oil production quota for most of this year, but has vowed to implement compensation cuts to make up for overproduction.
Iraq’s federal November crude exports, excluding those from the semiautonomous Kurdistan region, fell six per cent month on month to 2.709 million b/d, likely improving compliance with its OPEC+ quota, according to provisional data released by the country’s oil ministry Dec. 1. The ministry did not publish production figures.
Iraq has a production quota of 3.804 million b/d and had agreed to implement “compensation cuts” of 203,000 b/d below that in September and 165,000 b/d for October to December for its excess production from May to August.
Iraq plans to start exporting next year a new type of crude, Basrah Medium, in addition to the current grades of Basrah Light and Basrah Heavy, the minister said. In early November, the State Oil Marketing Organization notified customers that it was introducing this new grade to split Basrah Light into two crudes to support the stability of its oil export streams.
Iraq has also received interest from buyers for its proposal for a crude supply contract that include a partial prepayment for the oil supplied, the minister said. SOMO has received replies from more than one buyer, he added. SOMO is proposing selling 4 million barrels a month over a five-year period, with prepayment for the first year of supply.
Iraq plans to base its 2021 oil budget on a price of $42/b, the minister said. The country’s parliament is expected to start debating this month the budget draft bill. Iraq did not have a budget for 2020 due to a change in government.
Sources: Wood Mackenzie, Platts