The cartel has enough spare capacity to match demand barrel for barrel through 2021. They could slowly open the taps on supply as demand slowly returns to pre-COVID-19 levels. This type of OPEC+ policy could keep crude oil prices trading in a tight range by not allowing supply and demand to separate.
Global oil demand has risen dramatically from April lows as governments reduce or remove mandatory lockdowns that kept many from using petroleum products. Demand is still not near pre-COVID levels but continues to climb.
OPEC+ this week signaled it would increase supply in August, because demand was recovering. Continuing this policy, of supplying more crude into the market as demand increases, implies OPEC+ would match supply cuts evenly with returning demand.
The group has been curbing supply by up to 9.7 MMBbl/d since April, and will carry those cuts through the end of July. In August, the oil cartel will start to unwind a portion of those cuts. (see OPEC+ Plans 2 MMBBl/d Production Increase for August).
If OPEC+ follows this sliding-scale method of returning output, oil prices might face an uphill battle. With over 9 MMBbl/d in dry powder, OPEC+ can match increases in demand all the way back up to pre-Covid-19 levels. Worse (for prices), this doesn’t include capacity from Iran, which is currently stymied by sanctions.
Demand isn’t expected to reach pre-COIVD-19 numbers until at least late 2023 according to the International Energy Agency (IEA) and 2022 according to Goldman Sachs. If true, this means OPEC+ would have at least two years to slowly release more crude onto the market.
Oil demand in 2020 is pegged at about 92.89 MMBbl/d according to the U.S. Energy Information Agency, down from 101.04 MMBbl/d in 2019. If OPEC+ can meet demand with adding supply then the market would theoretically maintain the current supply-demand balance, which has produced a low-$40/Bbl environment.
There are of course other factors and variables that go into how supply and demand will evolve, but OPEC+ has the biggest lever to pull with near 9 MMBbl/d in spare capacity. If they so choose, the cartel could match increases in demand with supply to defend market share and affect price.