BAKU, Azerbaijan, Oct.19
By Leman Zeynalova – Trend:
Significantly lower prices are needed to force OPEC+ cuts, Trend reports with reference to the US JP Morgan Bank.
“In April, to tackle the drop in demand, OPEC and its allies agreed to a record supply cut of 9.7 mbd. Huge output cuts spearheaded by Saudi Arabia and Russia succeeded in lifting oil prices back to $40/bbl. The cut was then tapered to 7.7 mbd in August—a decision that cost the coalition control of price momentum but ultimately proved to be fundamentally well timed. The 2 mbd increase in OPEC+’s production starting from August 1 was more than fully absorbed by a 2.3 mbd increase in demand over the same time period. This dynamicis reflected in drawing OECD inventories and essentially kept the price anchored at a relatively comfortable $40/bbl (to meet their budget objectives for this year Russia and Saudi Arabia needed an average global oil price of $42/bbl and $43/bbl, respectively),” JP Morgan said in its report.
“The alliance is now set to relax the curbs further to 5.8 mbd at the start of next year, yet we think the trajectory of demand will be crucial to its decision-making in the coming months.
“A decision whether to proceed with the taper would likely be made at OPEC+’s December meeting. Our analysis estimates that Russia and Saudi Arabia are only $5/bbl apart in the oil price needed to meet their respective budget objectives in 2021 (Russia at $43/bbl, Saudi Arabia at $48/bbl). However, the tolerance level could be even lower as both Russia and Saudi Arabia could run wider deficits in the near term without jeopardizing debt dynamics. This implies that modestly lower oil prices even from here as a result of a slower recovery in global economic growth could likely be tolerated by both countries over the short term.
“With this in mind, we believe that there is no budgetary incentive for either party to cut production but, as in July, there is strong motivation to raise output if demand continues to recover. However, given the uncertainty over the trajectory of demand, the right course of action, in our opinion, is to wait for now. By December the shape of further demand recovery or the lack thereof will become clearer as will the tolerance of governments to keep their economies open despite rising infection count. So far we observe that the link between mobility and infection rates has broken down as world’s leaders are trying to strike a balance between targeted restrictions and keeping their economies open. The 2 mbd tapering could be potentially postponed by a quarter. After all, it is still hard for us to imagine that the world economy will not be able to absorb an additional 2 mbd of supply in 2021.
“We also believe that for OPEC+ to feel the need to make meaningful cuts from here, we either need to see the reemergence of tank-top capacity constraints, which looks unlikely at this juncture, or a structural reassessment of the global oil demand growth potential, a demise of which some argue has been accelerated by COVID-19. This would require global potential growth to be substantially and permanently damaged. While we still have full-year 2021 demand lower than pre-pandemic levels, at this stage, we don’t think longer term potential demand growth has lowered anywhere near enough to prompt action by OPEC yet.
Our price forecast for next year calls for Brent oil prices to average $47/bbl in 2021 under the assumption that demand will continue to inch higher and OPEC+ will slowly ramp up production throughout the year. This is broadly in line with the Russia/Saudi Arabia budget-implied oil price,” reads the report.
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