OPEC and allies reach agreement for 2021

Edward Bell - Senior Director, Market Economics
Published Date: 06 December 2020

OPEC+ managed to reach an agreement to avoid unloading an extra 2m b/d of oil on to markets from the start of next year at its ministerial meeting at the end of last week. Instead, the producers’ bloc agreed to increase production by 500k b/d and will hold high level meetings each month to determine production levels with the maximum monthly increase set at 500k b/d.

In volume terms the increase of 500k b/d for January will help to keep oil markets tight as demand recovers from the Covid-19 pandemic and other market oriented producers keep output relatively stable. We would expect to see inventories continue to draw in the first half of the year with the small increase in output that has been agreed, notionally supporting prices and time spreads. Our expectations for oil market balances in 2021 and prices are thus unchanged (target of USD 50/b for Brent futures on average and USD 47/b for WTI on average).

As ever, though, the critical issue in any OPEC+ deal is how well countries stick to the agreement. Oil demand is improving at a slow and hesitant pace, waiting for a Covid-19 vaccine to be deployed widely before oil consumption gets anywhere close to pre-pandemic levels. Along with higher output from Libya and Iran in recent months, that leaves little room for OPEC+ countries that have agreed to restrain output to miss their production targets. Even with these considerable challenges, collective OPEC+ compliance has been pretty good in 2020 so we are confident that decent levels of compliance will carry over in 2021, particularly as the bloc also extended the ‘make up’ period to allow countries that failed to hit targets earlier to cut deeper in compensation.

The monthly ministerial meetings will likely also contribute to regular bouts of volatility in oil markets given that around a third of total oil supply will now be set by monthly decisions. The most recent OPEC+ ministerial and JMMC meetings were expected to be relatively acquiescent sessions with a rollover of the current level of cuts widely expected. In the end, however, an extraordinary session before the meetings needed to be held and the actual meeting themselves were extended over the course of nearly a week, rather than their usual two days.

Oil market diplomacy has been reasonably good since the Declaration of Cooperation, establishing OPEC+, was set up in 2016. However, there have been large and public breakdowns, of which the Saudi-Russia price war in March-April this year was the most notable. The strains of keeping output restrained for so long, particularly as member nations have ambitions to increase capacity, could lead to more heated debate at upcoming OPEC+ meetings, leaving the oil market on edge on a routine basis.