During its Joint Ministerial Monitoring Committee (JMMC), the Organization of the Petroleum Exporting Countries (OPEC) and its allies called on members that are producing above target volumes to reduce output in August-September due to concerns over slow oil demand recovery.
OPEC suggested that oil demand could reach pre-COVID-19 levels by the end of the year, in a slight mismatch to its concerns of a slow demand recovery. At the August 19 meeting, Saudi Minister of Energy Prince Abdulaziz said the signs were encouraging and oil demand could return to 97% of pre-pandemic levels by 4Q2020. However, near the end of the meeting, the committee warned that the pace of demand recovery was slower than expected with “growing risks of a prolonged wave of Covid-19.”
Takeaway: Leaders of the OPEC+ alliance are closely monitoring their policy and have communicated to their members that what they are doing is working. AEGIS expects that OPEC+ is planning to match supply increases with demand as it comes back, one-for-one. If this policy is in fact what the group intends to do, then OPEC has about 5-7 MMBbl/d of supply to work with. Demand is estimated to return to near pre-Covid levels by the end of 2021, giving OPEC about 12-18 months to release supply and keep the S&D close to current balances. However, without additional supply from non-OPEC or stymied producers like Iran, Venezuela, and Libya, demand could outstrip OPEC’s ability to meet consumption near the end of 2021 (see the chart below, where demand lines exceed the dark shaded portions in 3Q2021). By current estimates, the inflection point at which OPEC can not match demand barrel for barrel could occur in late 2021.
The JMMC reviewed OPEC’s monthly report and developments in the global oil markets. The committee reiterated that achieving 100% conformity from all participating countries in the Declaration of Cooperation (DoC) and those needing to make up for shortfalls in quota compliance, is vital for ongoing rebalancing efforts and oil market stability.
OPEC and its partners reduced output earlier this year when global lockdowns caused the biggest oil-demand collapse in history. The cuts helped prop up the market as prices touched zero last spring.