The Organization of the Petroleum Exporting Countries and its allies, aka OPEC-plus, on Thursday agreed to boost production beginning in January by 500,000 b/d, ending a multi-day standoff over the timing and volume of an output increase because of concerns that new coronavirus outbreaks could dampen demand into early 2021.
The cartel and affiliated countries slashed production earlier in 2020 by 9.7 million b/d in response to pandemic-induced demand destruction and low oil prices. The group originally agreed to rebuild production in increments of 2 million b/d, every six months.
OPEC-plus proceeded with the first increases over the summer as oil prices started to recover. However, in meetings that began early this week, some members expressed concerns that demand would not support another increase in output in January, officials said during a virtual press conference Thursday.
After three days of deliberations, the group compromised on the smaller production increase. Members also agreed to review output every month between January and April, with further monthly adjustments during that period not to exceed 500,000 b/d.
OPEC members emphasized that post-January, production could be maintained or cut again, depending on conditions. Key members Saudi Arabia and the United Arab Emirates were on opposite sides of the debate, with the former in favor of maintaining existing levels – 7.7 million b/d.
“The jury is still out” on the pandemic’s full impact, “and because of that, we want to be cautious,” Saudi Energy Minister Prince Abdulaziz bin Salman Al-Saud said during the press conference.
The pandemic surged anew this fall in Europe and the United States, reaching record levels in November across much of the Lower 48. This dampened demand for jet fuel and gasoline refined from crude oil, raising concerns that consumption could be weak well into 2021.
Analysts anticipate that demand will pick up once coronavirus vaccines are widely distributed. Still, public health officials expect it will take several months to inoculate enough people to end the pandemic – around mid-2021, assuming vaccines are approved yet this year.
In its latest Weekly Petroleum Status Report covering the period ended Nov. 27, the U.S. Energy Information Administration (EIA) said Wednesday that overall petroleum demand fell 4% week/week and was 13% below year-earlier levels. On a year/year basis, jet fuel use was down 42% and gasoline for automobiles was down 12%. Rystad Energy said demand for road fuels in Europe currently hovers about 12% below pre-pandemic levels.
“Low road fuel demand is bad news for the oil market” and helps explain why some OPEC members were leery of boosting production, said Rystad Energy oil analyst Bjornar Tonhaugen. “Vaccine approval fast-tracking is seen as a positive by the oil market, but as it will take some time for vaccinations to be applied to the wider population, the support to oil demand will take time to be visible,” he said.
Nevertheless, oil output is already on the rise elsewhere.
The United States added 600,000 b/d over the past three weekly storage reports, while Libya has added roughly 1 million b/d over the past two months, said Mizuho Securities USA LLC’s Robert Yawger, director of energy futures.
OPEC in November forecast full-year 2020 global oil demand would fall by 9.8 million b/d from 2019. That marked a downward revision of 300,000 b/d from an October forecast and reflected the worsening pandemic’s impact on demand in the United States and Europe.
For 2021, OPEC estimated that oil demand would expand by 6.2 million b/d, though that outlook also reflected a 300,000 b/d drop from its previous forecast.
West Texas Intermediate futures rose about 1% after the OPEC announcement Thursday and hovered near $45.75 at 3 p.m. ET.
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