What Happens if OPEC+ Doesn't Delay Supply Increase?

If OPEC+ increases its production as planned from January, the world will have to face a new 200+ million barrel surplus through May, Rystad Energy calculates.

Should the production hike go ahead, in January the globe will endure its biggest monthly glut since April, with an average daily surplus of 3.1 million barrels for the month, Rystad Energy outlined. Smaller surpluses would be expected to continue through May, building a total glut that will exceed 200 million barrels for the first five months of 2021, before finally starting to shrink from June, Rystad Energy noted.

“We believe keeping the current agreement in place, which calls for raising target production by 1.9 million barrels per day from January 2021, could send Brent back down to $40 per barrel or lower,” Bjornar Tonhaugen, Rystad Energy’s head of oil markets, said in a company statement.

Tonhaugen added that, in a way, OPEC+ is already locked into extending its current cuts for some period in 2021 and noted that the group probably knows it will be punished by the market if it doesn’t do so.

If OPEC+ postpones its planned January production increase by three months, the world will still see consecutive monthly surpluses through May, but the total size will be limited to about 115 million barrels, according to Rystad Energy. If the output hike was delayed by six months, however, surpluses will end after March, leaving behind a smaller, three-month glut of 90 million barrels, which would be erased by the end of June due to deficits coming from April, Rystad Energy highlighted.

“A three-month extension would only provide marginal support to prices but would help to establish $50 as a sturdier floor, while a six-month extension could help to meaningfully deplete the storage overhang and supercharge prices into the mid-$50s,” Tonhaugen said.

Rystad Energy noted that there is an upside to its forecasts, especially for the second quarter of 2021, as its calculations do not yet include any material positive effect by vaccines on oil demand in the first half of 2021. The company said the reason for this is that the roll-out of vaccination campaigns still remains uncertain due to required regulatory approvals.

“Our assumption is for a slow and gradual roll-out that will take time before it results in lockdown liftings and behavioral change in the wider population,” Rystad Energy stated.

OPEC+ is currently debating whether to maintain its currently curtailed oil production levels or increase them as planned by nearly two million barrels per day. Back in April, OPEC+ agreed to cut 7.7 million barrels per day until the end of December and 5.8 million barrels per day from January 1, 2021 to April 30, 2022.

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