​A year after cutting unprecedented volumes of crude, the OPEC+ alliance is expecting world oil markets to get acutely tight.

The coalition, led by Saudi Arabia and Russia, believes the glut created when the coronavirus pandemic crushed businesses and fuel demand has nearly gone, and that oil stockpiles will diminish rapidly in the second half of the year as lockdowns ease and travel picks up.

That leaves the Organization of Petroleum Exporting Countries and its partners with a decision to start pondering on Tuesday: whether to pump more oil or hold back while the outlook is still so mired in uncertainty.

Keeping output steady would support the market against the twin risks of renewed virus outbreaks and a potential flood of exports from Iran if it renews a nuclear deal with the U.S. and other world powers. But with Brent crude already up 36 per cent this year to more than US$70 a barrel, that could hurt the global economy and worsen the inflationary pressures fixating Wall Street.

“There are many moving parts when it comes to factors affecting the global oil market, such as the pace of change during the pandemic,” OPEC Secretary-General Mohammad Barkindo said after preliminary consultations on Monday.

Embedded Image

At their virtual meeting on Tuesday, ministers are expected to press ahead with a gradual increase already penciled in for July, completing the return of just over 2 million barrels a day since May. According to a historic deal struck in the depths of the oil crisis last year, the group has committed to holding supply levels from then until early 2022. But a tight market may call for the agreement to be revised.

Delegates said initial discussions would begin on Tuesday about the alliance’s moves after July. No decision will be made, they said. But oil and bond traders will be closely scrutinizing their comments for any hints.

Stocks Shrink

OPEC’s Joint Technical Committee estimates that by the end of July stockpiles in developed nations will be below the 2015-2019 average -- a key benchmark for the group. Between September and December, inventories will be depleted at a brisk clip of more than 2 million barrels a day.

That’s led many observers to conclude OPEC+ will need to open the taps in the second half of the year.

“The market is now facing the exact opposite dilemma of April 2020,” said Louise Dickson, an analyst at consultancy Rystad Energy. “Producers now have just as delicate of a task to bring back enough supply to match the swiftly rising oil demand. If markets over-tighten, a flare-up in prices could jeopardize the global economic recovery.”

But the demand outlook remains beset with uncertainties, particularly in Asia. Indian energy consumption has taken a big hit as COVID-19 rages through the country. Japan and Malaysia, key consumers of OPEC’s crude, recently announced tougher measures to deal with new infections.

“The resurgence of COVID-19 cases in some Asian and Latin American countries remains a source of concern,” the JTC said in its report.

Iran Talks

Iran will be another critical factor. The Islamic Republic is in talks to revive a 2015 accord that limited its atomic activities in return for U.S. sanctions relief. Tehran is keen to reach an agreement before it holds presidential elections on June 18.

Russian and Iranian officials involved in the nuclear talks in Vienna said on Monday that there were still complicated issues to resolve. They hinted that the negotiators may not be able to strike a deal during the current, and fifth, round of talks.

 

If a deal is reached and Washington lifts sanctions, Iran may be able to ramp up exports quickly. Analysts estimate daily output could rise to about 4 million barrels from 2.4 million.

OPEC’s Barkindo said that Iran’s comeback would be “orderly and transparent,” causing no upset to the oil-market stability that other OPEC+ nations have toiled to achieve.

As ministers weigh the risks of bringing more oil back onto the market, the debate may well re-open old fault-lines within the alliance.

Riyadh and Moscow have often diverged on how quickly to bolster output, with the kingdom typically advocating restraint and Russia more impatient to expand sales volumes. The United Arab Emirates, another key player, has also shown eagerness to boost exports.

“It remains a delicate balancing act,” said Bill Farren-Price, a director at research firm Enverus and veteran observer of the cartel.