Opec+ believes the oil market is heading back towards balance. Saudi Arabia and Russia, the group’s leaders, decided yesterday to stick with the plan to start raising oil production a bit, phasing out the deep cuts that have helped prop up crude prices at around $40 a barrel.
Our first note looks beyond yesterday’s news to ask whether an even faster termination of the cuts is becoming more likely. Our second looks ahead, too, at Joe Biden’s energy plan — and explains why the Democratic presidential challenger is eschewing discussion of American oil and gas (production of which soared while he and President Obama were running the country).
Our monthly agency monitor, meanwhile, gives a snapshot of the main forecasters’ view of the oil market, and also notes the rise of US net petroleum imports.
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Just how much longer will Opec+ stick with its extreme cuts?
“The market must always look at what is beneath the headline,” said Abdulaziz bin Salman, Saudi Arabia’s energy minister, at the Opec+ joint ministerial monitoring committee meeting yesterday, “as well as our friends in the media.”
Indeed. Let’s start with the cartel’s production from August. In line with the tapering plan agreed months ago, Opec+’s production cuts will now ease from 9.7m to 7.7m barrels a day.
That remains a huge cut — on its own, far bigger than cuts in previous years. But the change means a 2m b/d increase in supply, right? No, said Prince Abdulaziz, because Iraq, Nigeria and other quota-busters will continue to “compensate” for earlier under-compliance, with extra cuts. So the reductions will in practice be closer to 8.1m b/d.
The market will have two problems with this. First, both countries have a terrible record of compliance with Opec cuts. How much discipline will they show when the rest of the group begins lifting output?
The second is how Saudi Arabia would impose discipline. Its established method of doing so — by threatening to open the taps to punish quota cheats — is now defunct. Donald Trump, the orchestrator of Opec+’s historic deal in April, would not allow it. Iraq, Nigeria, and everyone else knows this.
So what comes next?
“The market is very close to balance,” said Alexander Novak, Russia’s energy minister. To the cartel’s credit, this is an incredible outcome given the state of the market a few months ago.
But it will take unusual discipline for the group’s producers to maintain compliance. As the late, great Opec commentator Robert Mabro liked to say, Opec is like a teabag — it only works in hot water. That water was scalding in April, but is cooling.
Look further ahead and things become less clear. Opec+ is supposed to increase production again at the start of 2021, adding another 2m b/d. But market conditions will be different by then. Opec’s own forecasters, for example, think that between the second and fourth quarters this year, demand for its crude will rise by almost 13m b/d. It produced 22m b/d last month, but the so-called call on Opec will rise to more than 30m b/d by year-end and remain around that level through 2021.
Looking ahead, this means one of three things:
Opec+ will keep cutting as planned through 2021, leaving the market about 6m b/d short. Crude stocks would fall — a sound objective. But any price rise would revive non-Opec production (like that in the US).
As prices rise, Opec+’s own cuts will end so that the cartel — not its rivals — is able to capture the market share.
It is possible that Opec — typically focused on price and short-term outcomes — still doubts its own forecasts.
In short, something does not add up. Looking beneath yesterday’s headlines, it seems increasingly plausible that having brought the market to balance so quickly, Opec+’s cuts will end far sooner than its current long-term plan envisages.
What about the oil, Joe?
Joe Biden’s energy plan, unveiled on Tuesday, is ambitious. If elected president, he promises to pump $2tn into a programme that would markedly accelerate the transition to clean energy and create millions of jobs in the process.
But one thing was missing. The former vice-president made almost no mention of his plans for the oil and gas sector — a pretty core element of any energy platform. Don’t forget, the US is both the world’s largest oil and gas producer and by far its biggest market.
Instead, Mr Biden’s main focus was jobs — jobs in manufacturing turbines, jobs in retrofitting lighting, jobs in installing charging stations. Electricians, engineers, longshoremen, shipbuilders, iron workers and welders all got a look in.
In fact, Mr Biden mentioned jobs 19 times. The word oil, on the other hand, featured twice — once in relation to irresponsible executives; the other on how much crude would be taken out of the equation by electric vehicles. (He also mentioned creating another 250,000 jobs to clean up abandoned wells.)
This was deliberate. To beat Donald Trump in November, Mr Biden needs to convince a broad church of voters to back him — from Pennsylvania roughnecks to California climate activists: groups whose views on oil and gas (and especially fracking) could not be further apart. The solution has been to avoid big public statements on the issue.
Walking this tightrope has been tricky. During the primaries — when the aim was to win voters from Bernie Sanders — Mr Biden vowed there would be “no ability for the oil industry to continue to drill” and “no new fracking”. That risked doing damage in key swing states like Pennsylvania, where he needs shale workers’ support. Last week, he said fracking would not be “on the chopping block”.
The Trump camp wants to paint Mr Biden as “beholden to the radical socialist ideology” of leftwing Democrats like Mr Sanders and Alexandria Ocasio-Cortez, a New York congresswoman and “Green New Deal” proponent, and claims he would sacrifice millions of oil and gas jobs.
For now at least, Mr Biden has largely managed to avoid tackling the oil and gas question head on — and with it the risk of alienating either wing of his party. Surrogates have tried to calm the nerves of oil and gas workers, assuring them that a drastic overhaul of the sector is not on the cards.
That has not been enough to convince some in the sector who have already made their mind up. In a survey last month by the University of Houston and the Texas Oil and Gas Association, three out of four oil and gas workers said the election of Mr Biden was the greatest threat to their company’s well being over the next 12 months — a bigger challenge than oversupply, crippled demand or a coronavirus resurgence.
Underlining the vitriol with which Mr Biden’s plan to deal with climate change is viewed in oil heartlands, one columnist wrote in the Galveston News yesterday that his presidency would see the US “destroyed from within”.
“Climate change would be the No. 1 priority and if a basic income doesn’t shut down the economy, then climate change legislation will,” wrote Ray Holbrook.
The US has secured energy independence again — sort of. American crude production tanked in recent months as producers shut wells during the worst phase of the price crash. As a result, after six months in which it was a net exporter of oil for the first time in decades, the country returned to being a net importer. But with prices up and wells coming back online, that could flip once again: last week, the US exported 75,000 barrels a day more than it imported.
The three main oil-market forecasting authorities — the International Energy Agency, Opec’s secretariat, and the Energy Information Administration — released their latest monthly assessments. Here is our regular snapshot on what matters and what changed.
(Figures in million barrels a day)
*Includes Opec NGLs
Energy Source is a twice-weekly energy newsletter from the Financial Times. Its editors are Derek Brower and Myles McCormick, with contributions from David Sheppard, Anjli Raval, Leslie Hook and Nathalie Thomas in London, and Gregory Meyer in New York.