Against a backdrop of growing global concern over energy supplies, Opec+ ministers meet next week to discuss and agree output policy for November, and are expected to rubber-stamp the next 400,000 b/d monthly increase under their existing deal.
In this episode of The Crude Report, our Dubai Editorial Manager Nader Itayim and Editor-in-Chief Jim Washer discuss if Opec+ policy is on the right track, whether it can deliver more oil if needed, and what challenges may await the producer alliance in 2022.
[Jim Washer] Hello everyone. And welcome to this episode of The Crude Reports. My name is Jim Washer. I'm editor-in-chief here at Argus, and with me today is Nader Itayim, editorial manager in Dubai, who is joining us for this podcast to discuss the latest development in the Opec+ alliance ahead of next week's meeting. So Nader, how are things looking at the moment? What do we expect to happen when ministers get together next week?
[Nader Itayim] Hi, Jim. So as of now, we're not really expecting too many surprises going into the meetings. With global demand continuing to strengthen and prices really at almost three-year highs, I mean, most, if not all, ministers are going to be quite happy with the state of the market. And by most accounts, I mean, there seems to already be a strong consensus among delegates and ministers that additional supply is in order.
Now, exactly what does that mean? Just as a reminder, the roadmap that Opec and its partners are working off, it's one that sees the group's overall output quota raised by around 400,000 barrels per day, sort of every month. And that's from August through until the end of next year, or until really all of the oil that it took off as part of the landmark deal, the one last year, April 2020, until all that oil is back on the market. So whichever really comes first, but the group, they're still meeting on a monthly basis really just in order to confirm or to rubber stamp that the planned increases for the following month, just in case there are any unforeseen changes in the market dynamics or anything that really requires the rethink of policy.
You'll probably remember, but the group actually incorporated some kind of an option to pause the hikes for up to three months if and when required. So, what we're looking at for this upcoming meeting, it's really a decision by the group to either sanction under 400,000 barrel per day production increase from November or not. And several delegates have actually told us for the last few days that they expect it to be an easy meeting with not too much to discuss.
One slight curveball that we might see, if you can even call it that, is that maybe the ministers might sort of agree to take a decision, not just for November, but also December. That would essentially free the ministers from the need to hold another full ministerial meeting in November. Therefore, really the next meeting would actually be in December to determine January policy. Still though, even if that does happen, I mean, the technical and monitoring committees, the JTC, the JMC, things like that, those would actually still need to meet in November.
[Jim Washer] Okay. So we could get a two for the price of one next week, perhaps.
[Nader Itayim] Yeah.
[Jim Washer] I guess really at the moment with the way some of the projections of demand are looking and balances, is this 400,000 barrel a day monthly increase actually enough?
[Nader Itayim] Right. So that's a good question. I mean, just this week we saw Goldman Sachs that they were warning that the current supply-demand deficit is actually a bit larger than it had predicted, demand is recovering faster than projected, and supply really is remaining short of expectations. And some delegates we've also spoken to, they've flagged the same kind of thing. And they flagged that this, I mean, it really could, and most likely will prompt some of the more sort of usual suspects to push for an increase of more than the 400,000 barrel per day level that we've been talking about. Russia and Kazakhstan, for example, these have been countries that have typically been keen to raise output faster and harder than most others.
Now, although Opec+ has proven itself to be ready to bend or even change the rules, if and when needed, I personally don't see this happening this time around. Why? Honestly, it's because the majority of these countries in the group really aren't in the position to deliver on their current commitments, let alone inflated commitments, because of stalled or declining capacity. Opec+ delegates, I mean, they'd been warning for a while now that this could be an issue as we approach the final few months of the agreement, but looking at last month's production numbers, it looks like we might already be there. According to Argus' own production survey, the 19 countries that participate in the deal, they only actually raised their production by a combined 100,000 barrels per day. I mean, that's well below the 400 that they committed to in August. And that came as several countries really failed to hit their quotas. Nigeria, for example, they failed 260,000 barrels per day shorts, Angola 280,000 barrels per day shorts, Malaysia 140,000 barrels per day shorts. There were others as well, but those were smaller volumes, but still, it all adds up.
Now some of these countries, they say that those disruptions that caused the reduced output, they're temporary, and they're going to be able to raise production back soon. So Mele Kyari, the managing director of NNPC, Nigeria state oil company, he told Argus last week that he expects Nigeria will be able to bring back these lost volumes, so to speak, by the end of October or at the very, very latest mid-November. But others will struggle from now on. The bottom line is that there's very little spare capacity left outside the Middle East Gulf.
Many of the other countries in the coalition, I mean, even Russia, these countries are already very, very close to what they can sustainably produce. So, back to the question of whether this is enough, I mean, the fundamentals may suggest no, but in the current framework, we may not even be able to get to the headlined 400,000 barrels per day increase.
[Jim Washer] Okay. I mean, that's very interesting what you say about the sort of strain on Opec+ spare capacity at the moment because there's been a lot of anxiety about energy supplies worldwide. Really in recent weeks, we've had soaring gas prices. We've had impact on the industry, factories closing, et cetera, even problems getting fuel to service stations in some countries. And there's been with this, this kind of worries over the lack of investment in traditional oil and gas capacity, whether it be in Opec or other non-Opec countries as the world starts to focus more on the energy transition. That worry about investment in the upstream and oil and gas production capacity, do you think that has implications for Opec?
[Nader Itayim] I'd say yes, but possibly not immediately, that is unless the narrative around the energy transition changes. I mean, just last week we had a long, long overdue gathering of industry heavyweights at the Gastech conference in Dubai. And unsurprisingly, I mean, energy transition, it came up and how we navigated. These were some of the hottest topics there. In essence, the main takeaway though, I think was that while energy transition is here and we're all supported, we really need to be cautious and realistic about how we actually implement it and get to this net-zero. The UAE and Qatar ministers, they were there and they were both speaking at the event. And they really, again, just cautioned against this idea that was sort of introduced by the IEA several months ago that hydrocarbons have no place in the transition and we need to stop investing in hydrocarbon.
I mean, the UAE Energy Minister, Suhail Mazrouei, he was saying that really the responsible thing to do is to continue to invest in capacity as the UAE is doing, while also aiming to become a global leader in low carbon hydrogen production. And Mazrouei's argument, which has really been echoed by many in the industry, it's the... Look, if we don't invest, it's ultimately going to be the consumers that suffer. Prices increase because there's a supply crunch down the line. He said that's something that governments really do need to be honest and transparent with customers about, consumers, and things. Qatar's energy minister was also there, Saad Al-Kaabi. I mean, he also said the governments need to be clear with their people what such a swift transition away from hydrocarbons would mean for their day-to-day lives.
He pointed out that hydrogen for power generation, that's going to cost what, between two to five times as much as gas would. Who's going to pay for that? And in terms of these net-zero targets, Al-Kaabi was saying that we need much better planning. In effect, the governments are coming out and they say what they want, but they're really unclear on how they want to achieve it. So it's really not that beneficial, not to the governments or the average Joe. As of now, the feeling is that there won't really be too much of an impact on Opec in the short run. But whatever impact this new energy transition, excuse me, this drive could have on demand for oil in Opec, that's ultimately going to depend on how this narrative develops over the coming months and years.
[Jim Washer] Okay. Well, let's look a little bit more at the short term and what they need to do with output policy. I mean, Opec seems pretty comfortable with what it's got to do for the rest of the year, keep on increasing output, but what about 2022? Does that look equally comfortable or more challenging, do you think?
[Nader Itayim] Right. So, 2021, as you say, it seems straightforward and that the only way is up, but 2022, it could really prove more challenging for the group. That's something that was flagged by the Opec group's technical committees ahead of the last Opec meeting earlier this month. I mean, what they found is that, although in the short term, i.e, through the end of this year, the market's going to remain in deficit. It's going to almost certainly flip into surplus next year. The base case that they were looking at it, it saw that global OCD stocks, commercial stocks standing at around, I think it was 56 million barrels below the five-year average that they're using in this case, it's 2015/2019 by the end of this year. Tut in 2022, by that point, it saw significant stock build and it placed inventories at just under 150 million barrels per day, above the five-year average, by the end of 2022.
The second scenario, which sort of assumes weaker demand growth and higher non-Opec supply next year, I mean, that one envisage stocks at a mammoth 495 million barrels per day above the five-year average by the end of next year. But I think what needs to be said is that these productions, these are based on the assumption that the group proceeds with the gradual unwinding of its cuts as set out by the roadmap that it agreed on, which, as we discussed a few minutes ago, it might be easier said than done given the supply side issues we're already seeing from some countries. But even beyond that, we have to remember that Opec and now Opec+ it's shown repeatedly that it's nothing if not flexible. If there's a need, I mean, I personally am in no doubt that they'll be the first to admit it and highlight it, that a change in course, we're thinking, is required.
[Jim Washer] I suppose, a few potential pain points for Opec have subsided a bit in recent months, this question of Iran, the return of Raisi exports with progress on the JCPOA in relations with the U.S., that no longer seems such an imminent issue. And on that point, particularly, where do you think things stand now with respect to Iran?
[Nader Itayim] We're now at a point where both sides really seem to be saying the right things publicly or behind closed doors, but not really following them up with actions, and that's causing a lot of undue frustration. And to be honest, this wasn't totally unexpected after the election of the distinctly more hard-line government of Ebrahim Raisi in June. As of now, the talks that began in April with the U.S. over revival of the nuclear deal, the JCPOA, they've yet to resume after being put on ice in June, a little bit after the election. Iran's partners in the deal, so that's China, Russia, the UK, France, Germany, and of course the U.S., they've all really been urging Iran to return to the table, but Iran is making them wait.
It's insisting that the new government, it needs time to settle in really before engaging, re-engaging, should I say, over the JCPOA. There was some hope that the 76th session of the UN General Assembly in New York over the last couple of weeks, it could facilitate some kind of discussion and progress on the JCPOA front, but as reported in the latest issue of Petroleum Argus, very little of note was achieved. The Iranian side's been making some encouraging noises over the past few weeks about a return to the talks with its new foreign minister, Hossein Amir-Abdollahian. He was saying just a few days ago that Iran could come back to the table very soon, but that has come really with the much-repeated caveat that it would need to come with some kind of action from the Biden administration to sort of back up its words.
That's again, very much in line with the idea that we've previously flagged, that the Raisi administration would really likely drive a harder bargain than its predecessor. So essentially what Iran wants now is to squeeze a little bit more out of the U.S. in an effort to ensure that, A, it gets all the benefits it's signed up for under the JCPOA that it feels it never got initially, but also that the deal is sort of not a prisoner to the next U.S. president that comes in and chooses it's not something that they agree with or...
One interesting development the last few days, I mean, [inaudible 00:13:16] a recent report issued by the Iranian parliament's research arm, it kind of gives a flavour of the kind of things that it's requiring of the U.S. Among them was the ability to sell up to 2.5 million barrels per day of its oil, or the free repatriation of its funds, the allowance of foreign companies to invest in Iran without the fear of percussion or sanctions from the U.S., and the delisting of a large majority of individuals and entities that are today sanctioned by the U.S.
U.S. officials for their part, at least so far, they continue to say they're prepared to talk and come back into compliance if and when Iran does. But again and again, they stressed that they're not going to be waiting forever. So while the return to talks could come soon, there are very, very real concerns that progress could be incredibly slow, pushing back any potential lifting of sanctions and the return of [inaudible 00:14:08] oil to the markets into early next year at the earliest.
[Jim Washer] Okay. It sounds like that timeline is really extending much more than we were thinking it might earlier this year. Okay. Interesting. Well, we are also coming out to the end of our timeline here. So thank you, Nader, for taking some time to discuss some of the key issues with us at the next week's Opec meeting. If you're interested in keeping up to date with our in-depth Opec news analysis, then why don't you subscribe to Argus Global Markets or Petroleum Argus or indeed both? And you can find more information on these services at www.argusmedia.com. So thanks for tuning in, and we look forward to you joining us again on the next episode of The Crude Report.