OPEC+ Flexibility Needs to Cut Both Ways

(Bloomberg Opinion) -- Flexibility needs to be the guiding principle of the OPEC+ group right now — after all, that's why its member are meeting every month.

The oil ministers of the Organization of Petroleum Exporting Countries and their allies will meet on Thursday to decide their production target for August, and perhaps beyond. They are gathering with Brent crude close to its highest level since October 2018, amid calls from key customers for them to boost production.

Not everyone agrees that's the right thing to do. Key alliance members, most notably Saudi Arabia and Kuwait, are urging caution, while Russia is pushing to open the taps wider.

Ever since their big bust-up in March 2020, which ushered in a brief production free-for-all just as the pandemic slashed oil demand, the two camps have found ground for compromise. And it's likely they will do so again. They are already scheduled to add 840,000 barrels a day to oil supplies from the beginning of July, bringing the target to the level they'd originally planned to reach six months ago. But they need to add more in August.

Sure, there are uncertainties, but that is no reason to do nothing.

The delta variant of the coronavirus is proving stubbornly difficult to deal with and, while some economies are roaring ahead thanks to widespread vaccine rollouts, others are still struggling and international travel remains severely restricted. That casts a shadow over robust demand forecasts from the International Energy Agency, banks, analysts and even OPEC itself. 

Global fuel consumption is outstripping supply by 3 million barrels a day, according to Goldman Sachs Group Inc. And whatever OPEC does, the market will remain “really tight” until the U.S.'s Labor Day holiday, Jeff Currie, Goldman's head of commodities research, said in a Bloomberg Television interview.

In India, retail fuel prices have risen to their highest since at least 2002 in local currency terms, prompting Oil Minister Dharmendra Pradhan to express “deep concern” over the impact of spiraling energy prices on inflation and call for “affordable” supplies, with prices in a “reasonable band” as he repeated a request for OPEC+ to boost production.

OPEC's own analysis shows the world's need for its crude rising to 28.66 million barrels a day on average in the third quarter. That's about 1.5 million barrels a day above the group's July target, assuming Iran, Libya and Venezuela continue pumping at recent levels.

Commercial oil stockpiles in the OECD countries were already 20 million barrels below their 2015-2019 average at the end of May, according to the group's Secretary General — a key target for Saudi Energy Minister Prince Abdulaziz Bin Salman.

The other big uncertainty is whether Iranian crude will return to the market if the 2015 nuclear deal is revived. The National Iranian Oil company says the bulk of its crude oil production can be restored within one month of the easing of U.S. sanctions, potentially adding almost 1 million barrels a day to supply. But diplomats doing the negotiating won't reconvene as planned this week in Vienna and they aren't sure when a seventh round of talks will happen. That will push back any additional Iranian supplies, which now look unlikely before the fourth quarter.

This is precisely when OPEC+ should take full advantage on its new malleable modus operandi. It has shown how adaptable it can be in responding to a recovery that has been slower than it anticipated. Through a combination of delaying the easing of targets and additional voluntary cuts from Saudi Arabia, it's revised its production target from the original plan many times since the deal has been in force.

With higher oil prices hurting key customers, now is the time to pull its monthly levers in the other direction and agree to a bigger-than-expected output increase. After all, it can always be reversed next month if things don't go as planned. That's the whole point of flexibility.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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

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