OPEC+ JMMC: Concerns about balancing markets for now
In some ways the Joint Ministerial Monitoring Committee (JMMC) of the OPEC+ alliance of OPEC countries and their 10 non-OPEC allies, lead by Russia, was an easy meeting, because the September compliance with the 7.7 million barrels per day (bpd) production cuts was very good indeed: One hundred and five percent for OPEC, and 103 percent for OPEC+ according to the group, and 101 and 99 percent compliance according to S&P Global Platts.
Compliance had been an issue over the summer months, with mainly Iraq and Nigeria overproducing. In August, even the UAE surprised many by pumping 250,000 million bpd above its quota. The laggards had promised to compensate for that excess by the end of 2020; the UAE has made up for more than 60 percent of its sins in September alone, according to S&P. Iraq is diligently working towards compensating overproduction; things may be more difficult for Nigeria, where the coronavirus disease had a devastating effect on the economy, and security concerns persist.
The JMMC is co-chaired by Saudi Arabia’s energy minister Prince Abdul Aziz bin Salman, and his Russian counterpart Alexander Novak. Prince Abdul Aziz had strongly reprimanded the laggards during last month’s JMMC, but this month the tone was less strident. The prince reminded delegates that while compliance was good at this point, he could “not emphasize strongly enough to show the strength of our resolve,” when it came to adhering to the playbook of OPEC+ and for each nation to observe production cuts. He mentioned three key principles: OPEC + must be “predictive, preventative and proactive” — guiding principles of OPEC+ ever since oil demand fell off a cliff in April and West Texas Intermediate turned negative, resulting in historic production cuts.
To be fair, Saudi Arabia had been warning of the impact of coronavirus on oil demand since the beginning of 2020 when the pandemic first emerged.
Initially, demand recovered faster than expected, but the virus came back with a vengeance in the northern hemisphere, leading to restrictions, lockdowns and severe limitations on cross-border air travel, particularly in Europe. This painted a really bad demand picture, reflected in the muted statements by both Prince Abdul Aziz and Novak. They did not say so, but you could feel that the deteriorating economic situation did not bode well.
As though the demand picture was not grim enough, there was also more crude hitting the market, especially from Libya, to the tune of 500,000 bpd. The country produced 1.2 million bpd before Gen. Khalifa Haftar shut in oil infrastructure at the end of 2019, meaning upside in Libyan production.
We should also contemplate what a potential Joe Biden presidency in the US could mean for Iranian production, if Washington dials back sanctions imposed on Tehran. Libya, Iran and Iraq are currently exempt from the productions cuts, which clearly cannot continue if some of these countries increase production significantly.
The concerns were reflected in phone calls between Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin. The frequency of communication between these leaders, in the course of one week, was unprecedented, and reflects the dimension of the concerns. The first conversation was apparently initiated by the Kingdom and the second by Moscow, which goes to show the level of concern in both countries.
No wonder then that Prince Abdul Aziz stressed in his opening statement: “I cannot emphasize strongly enough how vital it is to show the strength of our resolve. Nobody in the market should be in any doubt as to our commitment and our intent.”
These are strong words indeed, and just what the doctor ordered under the current circumstances.
The final communique stressed again the need for compliance, which is all that OPEC+ can do at this point. The question remains whether the 23 countries can afford to taper their production cuts from Jan. 1 through April 30, 2021, by 1.9 million bpd, as was initially planned. The virus and Libya may well make this plan a tenuous proposition, as long as the coronavirus savages economies in the northern hemisphere and Libya and others bring on unexpected supplies. Balancing the oil markets is, after all, the key goal and raison d’etre of OPEC+.
The communique of the JMMC rightfully mentioned that all member counties needed to remain “vigilant and proactive, given the precarious market conditions and prospects, which is no surprise given Prince Abdul Aziz’s opening statements.”
The president of OPEC, Algerian Energy Minister Mohamed Akab, made a pertinent point during the JMMC’s opening proceedings: While we are all despairing about oil markets in the short run, we should not forget that oil will be a substantial mix of primary energy demand through the 2040s, remaining around 25 percent of primary energy demand until 2045. In the current climate, which is dominated by oversupply and falling demand, investments required to supply future demand become increasingly difficult. Overlay the climate change debate and too few companies will be willing to commit the necessary dollars behind the projects necessary to guarantee ample oil supplies in future.
This may not be today’s topic, when sliding demand is the issue and we need to ensure the supply demand balance does not swing out of control. However, fast forward 10-15 years or so, and the equation may reverse.
• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources