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OPEC+'s shift to potentially monthly adjustments could result in looser compliance

Oil&Gas Materials 14 December 2020 13:05 (UTC +04:00)
OPEC+'s shift to potentially monthly adjustments could result in looser compliance

BAKU, Azerbaijan, Dec.14

By Leman Zeynalova – Trend:

OPEC members will continue to hold back production in a coordinated effort to reduce existing stockpiles by keeping the market undersupplied, Trend reports with reference to Fitch Solutions.

The December 2020 agreement to increase January 2021 output by 0.5mn b/d, versus the 1.9mn b/d originally outlined, marks a decided shift in how the OPEC+ group will operate, the company believes.

“For 2021, monthly meetings will dictate the adjustments in production, with output either increasing or decreasing by 0.5mn b/d increments, until 2.0mn b/d in total has been restored to the market. The shift to a new monthly strategy of response signals means that OPEC+ will be more reactive to market conditions and may indicate that multiple actions could be taken during the year if the strategy proves successful in balancing the market and preventing a decline in oil prices,” reads a report released by Fitch Solutions.

The report shows that while the overall strategy may support oil prices, it further strains members who are struggling with immediate financial constraints.

“In addition, continued OPEC curtailment raises uncertainty about longer-term constraints, which could in turn raise doubts around investment strategies to increase production capacity in the future. OPEC+'s shift to potentially monthly adjustments could result in looser compliance and encourage front-running targets to capture price and demand upswings as members seek to maximise revenues by taking advantage of higher prices without providing enough fodder to scupper the deal,” said the company.

Fitch Solutions forecasts that OPEC and its partners will need to remain cautious throughout 2021, but recent overtures to the market and the improved demand outlook, with multiple vaccines awaiting approval and distribution, have seen investors begin to price in expectations that the market will be undersupplied.

“The six-month and one-year term spreads for Brent are both backwardated, which bodes well for higher prices. Backwardation through 2021 is a sign that OPEC’s efforts are working to bring down 2020 stock builds. However, the cost of curtailing production may be too high for some members, while others will push for a faster return of output adding to the likelihood of variable compliance. This will challenge the cohesion of the group and raise uncertainty around its future,” the company said.

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