New Covid variant puts pressure on OPEC oil producers

Releasing reserves complicates OPEC+ decision. Photographer: Luke Sharrett/Bloomberg

The OPEC+ group of oil producers are meeting on Thursday and their job has just been made more difficult by President Joe Biden and a new coronavirus variant.

The group will gather virtually to decide their production plan for January. A pause to their 400,000 barrels-a-day monthly output increases was already in the cards. OPEC's analysts see the oil market swinging from its current deficit to a huge surplus in the first quarter of next year. Saudi Energy Minister Abdulaziz Bin Salman has even said the switch will happen as soon as December.

Other, more realistic, assessments of the OPEC+ group's production imply a surplus of supply in early 2022.

That alone would be enough to give the producers pause. Now a new variant of the coronavirus has emerged and spooked markets. Friday's slump in oil prices reflects fears of a new wave of lockdown measures and flight cancellations, just as the holiday season approaches.

The emergence of a new covid strain should make producers even more likely to halt the steady addition of barrels in January. But the decision is being complicated by several countries' coordinated release of emergency stockpiles. The amount made available will probably be more than 70 million barrels of crude and refined products from reserves in the US, India, Japan, the UK, South Korea and China. It remains unclear how much of that will actually be taken up by the industry.

OPEC estimates that the release will add roughly 1.1 million barrels a day of supply in January and February to a market that will already be in surplus. Offsetting most of that by the end of the first quarter would mean giving up the increases planned for both January and February.

The rationale for pausing OPEC+ output increases looks overwhelming. Adding extra supply to a market that already has more crude than it needs would appear to make it a foregone conclusion. And yet, nothing is that simple when politics are involved.

Any decision to forgo an output increase would have been seen as a direct response to the US-led stockpile release. As Citigroup noted, such a move would "clearly erode" the group's claim to be stabilizing oil markets.

This is a complication that could have been avoided by agreeing earlier this month to an additional output increase of as little as 200,000 barrels a day for December. That would probably have been enough to dissuade Biden from releasing strategic stockpiles and would have made it much easier to pause, or even reverse, the increase planned for January.

At its peak in October, Brent crude was up by 66% from the start of the year. After Friday's fall it's still about 40% higher than at the beginning of January. While that's a much smaller rise than we've seen in natural gas, coal or electricity prices in many parts of the world, it is still a significant increase.

The slump in prices resulting from the discovery of a new coronavirus variant, may make it easier for OPEC+ to abandon its planned January output hike. But whatever the outcome of Thursday's virtual gathering, Saudi Arabia will want unanimity, with all of the group's 23 members marshaled behind a decision before the ministers gather. Although the country may well want a change of policy, it probably doesn't want to be seen as leading a push of unwilling allies toward one.

So expect a lot of behind-the-scenes discussions before Thursday. As for the outcome of the meeting itself, it's too close to call. But I certainly wouldn't bet against an output freeze, or even a cut, if prices don't recover from Friday's rout.

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.