The trajectory of OPEC’s production recovery since July has been flatter than expected and generally market supportive. However, managing the supply side has become increasingly difficult as the recent global rebound in COVID cases reinforces concerns about this summer’s plateau in demand, and the path for GDP, and demand recovery, heading in 2021.
OPEC+ held its Joint Monitoring Committee Meeting (JMMC) midmonth. The purpose was to evaluate member quota compliance in recent months and lay the groundwork for possible adjustments in production strategy from November 1st. The Saudi and Russian ministers were unified in the recognition that a faltering global demand recovery may force OPEC+ to make additional supply cuts. That said Russian energy minister Alexander Novak made it clear following the JMMC that Moscow will not be making decision on production cuts before November’s meeting. Saudi oil minister Prince Abdulaziz bin Salman stressed OPEC+ must nip negative trends in the bud and warned no one in the oil market should doubt OPEC + resolve.
Libyan Curve Ball
Demand uncertainty is not the only big challenge facing OPEC as 2020 ends. After nearly a decade of civil war in Libya there is now enough rapprochement between the two warring factions that oil exports have now resumed. In January, the Libyan National Army, or LNA, implemented a blockade on exports in its battle for control of Libya’s oil, and leadership, with the UN-recognized Government of National accord (GNA). This effectively dropped production from 800,000 bpd to YTD lows of just 80,000 bpd in August.
Libyan production in September averaged 150,000 bpd according to Bloomberg estimates and initial expectations were for October to rise toward 275,000 – 300,000 bpd. As more fields have been reopened, and force majeures lifted at a growing number of export terminals, it has become evident that the output recovery is exceeding expectations. Ship tracking data for the first half of October suggest production was closing in on 500,000 bpd mid-month. This is an increasingly material volume that OPEC will have to make room for going forward. Accommodating Libya becomes that much more difficult with OPEC already contemplating the need to implement additional cuts to adjust for the stall in global demand recovery.
Running out of runway on ‘Make-Up” cuts
Accommodating Libya will also be more challenging as we move beyond material OPEC+ “make-up “cuts in the 4Q. The Saudi’s pressured their ally the UAE to make up for summer quota busting with a >300,000 bpd cut in September. The make up cut by the UAE nearly offset a flurry of smaller increases across OPEC’s membership.
Going forward substantial make-up cuts still owed by Iraq to OPEC+ have the potential to temper production rebounds elsewhere. That potential is limited however by the lack cooperation between the central government/oil ministry in Baghdad, and the KRG leadership of the semi-autonomous Kurdish region in Northern Iraq. The Kurds have made it clear they have no interest in the obligations pledged by Baghdad and as such we do not expect to see much if any Iraqi make-up this quarter.
The election, Joe Biden, and Iran
A great deal of election uncertainty, and questions, have focused on potential “fracking bans”/ blocked access to federal leases, etc., and much tighter regulation of upstream oil and gas development. Specifically, what are the longer-term supply implications of shale reserve development under this scenario.
But a more pressing concern for global oil markets, and OPEC, is the potential for any easing of Iranian sanctions by a Biden administration. To be clear we do not see this as a top or early priority for a new administration early next year under the current COVID-dominated environment taking precedence. However, the possibility clearly increases with Biden versus Trump. The Iranian export volume in question would be a multiple of two to three times the volume now under discussion in Libya.
Saudi Budget Provides Price Framework
A key driving factor behind OPEC‘s high degree of quota compliance in 2020 is the pressure the Saudis, via Crown Prince MBS and energy minister Prince Abdul Aziz, are now willing, and seemingly able, to wield on their neighbors and allies. The Saudi budget for 2021-2023 ties out to $50.00 oil. This is obviously above current price levels, but would still likely force Saudi Arabia to burn additional foreign currency reserves. We would look at $50.00 more as a Saudi target minimum and suggest it is a strong motivation to guide the market higher.
Saudi motivation, and discipline, clearly needs to be maintained, and we think it will be maintained. However, the task has gotten that much tougher given the return of Libyan exports, question around Iranian sanctions under a Biden administration and little in the way of “make-up” cuts to lean into.