Opec+ has decided to stay the course and maintain the tapering pace at 400,000 barrels per day (bpd), tempering market expectations of incremental supplies over the near term, said British multinational bank Barclays in a new report.

The move likely reflects a lack of urgency within the group to ramp up output on expected surplus next year and limited capacity with key producers, said the bank’s latest “Commodities Research”.

Key benchmark prices increased 2-3% on the news because some market participants had suggested that the group could increase the pace of tapering, given the tight inventory situation, and markets were therefore a bit cautious going into the meeting.

The move looks a bit outsized given the ministers just reaffirmed the decision announced in July but it shows how tight the market is, reinforcing our view of asymmetric price action with risks skewed to the upside at these inventory levels.

“We maintain our above-consensus outlook for oil prices as the inventory situation is likely to remain tight in 2022 despite the expected surplus on improving demand and shrinking spare capacity,” Barclays said in the report.

No urgency to change the course on expected surplus and limited capacity:

The decision to stay the course was likely made with an eye on the expected surplus next year. The supply deficit is expected to persist through Q1 22 but there should be a surplus for the rest of the year as supply catches up to recovering demand.

For the full year, Barclays see a surplus of 0.5 million bpd and the Opec+ Joint Technical Committee sees a much larger surplus of 1.4 million bpd in 2022.2 The decision to continue tapering at a moderate pace is therefore likely in part driven by the intention to keep the inventory situation relatively tight next year even if that causes the market to overheat over the very near term, as it is less likely to weigh on demand, which is still largely being driven by a re-opening led recovery.

“In addition, we also see reduced urgency for the group's key members to push for higher targets as Saudi Arabia's output would be in line with the Q4 19 level (c. 10 mbpd) by the end of this year and Russia has limited capacity to ramp up crude output significantly above 10.5 mbpd, which we expect it to reach by the end of next year assuming 200,000 bpd aggregate monthly increments in targets starting January 2022,” the report said.

Expect slower tapering next year unless US output surprises to the downside:

“The risk to our view that Opec+ would slow the tapering pace next year is that US output recovery is slower than we expect. We forecast a 700,000 bpd Q4-to-Q4 increase in US oil production this year with L48 onshore activity driving most of the gains over July. Our Q4 21 US crude production forecast is 300,000 bpd and 200,000 bpd above the EIA's and IEA's latest estimates.

“If the recovery in US output is slower than we forecast, the year-end inventory situation would be even tighter and would also drive down surplus expectations for next year, all else equal, which could lead Opec+ to maintain the tapering pace into next year. However, such a scenario would only bring forward the market realization of the actual spare capacity in the system and keep prices supported, in our view,” the report said.

The next Opec+ meeting is scheduled for November 4 to discuss the plan for December. – TradeArabia News Service