OPEC+ issued its new agreement for the year 2021 in early December. A discussion that was expected due to the major disruptions on the world oil market due to the health crisis. Indeed, the alliance, formed in 2016 by OPEC members and 10 other producers, had already agreed on a 9.7 million barrel per day cut in April 2020. This would have been gradually reduced over time. This new agreement readjusted the previous one while confirming the increase in oil production at the beginning of 2021.
OPEC+ 2021 agreement increases oil production
OPEC+ members agreed on December 3, 2020 to gradually return 2 million bpd to the market according to Oilprice. From January 2021, 500,000 b/d will be produced. Thereafter, OPEC+ ministers will meet monthly to assess market conditions and decide on adjustments for the following month, up to a limit of 0.5 million barrels per day (mb/d), according to NS Energy. As a result, members decided to increase production from 7.7 million bpd to 7.2 million bpd in January 2021.
Ann-Louise Hittle, vice president of Wood Mackenzie, said:
“After OPEC’s first session on Nov. 30, without its non-OPEC partners, signs of discord have emerged over the concept of simply rolling over current production limitation levels of 7.7 million b/d. Under the April OPEC+ agreement, this limit was to be eased by a 5.8 million b/d cut on January 1, 2021. In November, the idea of delaying this easing of the production limit gained momentum. This reflected widespread concern that weaker-than-expected global demand would lead to a significant oversupply in the first quarter unless OPEC+ curbed the planned increase of nearly 2 million b/d.”
A protection of the world oil market
The oil countries have decided to extend the compensation period until March 2021 in case of overproduction. Indeed, the group is committed to ensuring market stability. OPEC said:
“Looking ahead, the meeting emphasized that it is critical that DoC participants, and all major producers, remain fully engaged in efforts to balance and stabilize the market.”
An oversupplied oil market
According to Forbes, global oil markets have rallied over the past six weeks on the back of the Covid-19 vaccine announcement. Despite the hope of a recovery in global oil demand, this may not happen for a few months while the population is vaccinated. A large oil production could then be injected into the market, which would drive oil prices down again.
A skewed view of oil growth
In light of OPEC’s forecast for oil demand in 2021, some member states, such as the United Arab Emirates, are pushing for increased production. Indeed, according to an OPEC report, oil demand will rebound by 6.2 million BPD in 2021. However, the health crisis has forced a reduction in production and some believe that an oil shortage could occur. But in fact, there is currently a very high level of oil storage. Thus, there are still many tensions between OPEC+ members.
The resumption of Libyan production not taken into account
According to Reuters, Libya has seen a significant resumption of oil production that had been halted for many months due to a blockade by Khalifa Haftar. Production is estimated to have increased by nearly 700,000 bpd in November. However, this OPEC member is exempt from the supply cut like Iran and Venezuela, which have also increased their production recently. The United Arab Emirates also increased its production by 90,000 bpd. Increases that have not been taken into account by OPEC + in the calculation of these reductions.
Other issues are not taken into account, according to Oilprice, including the threat of Iran’s re-emergence, high Iraqi production or Joe Biden’s possible lifting of sanctions. They also do not take into account the potential negative effects of higher oil prices, which could lead to a surge in U.S. shale and other production. This agreement therefore reflects the current difficulties in predicting the future of the oil market.
Numerous dissenting voices within OPEC+.
For some, such as Russia, Saudi Arabia and the United Arab Emirates, this agreement is a burden. This market stabilizing role has affected government budgets. States are therefore increasingly reluctant to implement this agreement.
This new 2021 OPEC+ agreement therefore has many difficulties in preventing the future of the oil market and ensuring its stability. More seriously, it does not ensure unity within the group.