How OPEC Sees Oil Market In 2021?

Last week, Organization of Petroleum Exporting Countries (OPEC), in conjunction with some Russia-led oil producers, agreed to increase oil output by 500,000 barrels per day (BPD) in January 2021. The oil markets rallied, because there were some concerns that OPEC could increase production by 2 million BPD.

There was reportedly a lot of disagreement among OPEC members prior to the announced agreement. The United Arab Emirates reportedly pushed hard for a larger production increase, which it argued the global oil market could absorb.

The global oil markets have rallied over the past six weeks, driven primarily by news that vaccines will soon be available to fight the COVID-19 pandemic. The much anticipated end to the pandemic offers some hope of recovery in global oil demand that has plummeted since the start of the pandemic.

OPEC members certainly want to take advantage of this spike in prices, but the reality is that oil demand is probably still a few months away from bouncing back substantially. In fact, given the precarious state of the US economy — and the fact that it will be late winter at the earliest before a substantial portion of the population is vaccinated — US oil demand may not return to normal until the second half of 2021.

That poses a risk that OPEC is putting more oil into an already oversupplied market, with the risk that this will send oil prices down yet again. So what could be OPEC likely strategy?

Analysts can get an idea by looking at OPEC’s Monthly Oil Market Report. The report projects that global economic growth is going to contract by 4.3% in 2020, but 2021 forecast projects global growth of 4.4%.

While OPEC expects final 2020 oil demand to be 9.8 million BPD, lower than 2019, it projects oil demand to bounce back by 6.2 million BPD in 2021. OPEC expects the strongest demand growth in 2021 from India (14%), China (9%), the US (7%), and Europe (7%).

We can look at OPEC’s expectations for oil supply growth in 2021 and see why some members are pushing for a greater production increase. After non-OPEC oil supply contracted by 2.5 million BPD in 2020, OPEC projects that non-OPEC supply will expand by less than one million BPD in 2021. OPEC had cut production by nearly 10 million BPD as the pandemic grew, and producers are anxious to recapture some of those production cuts.

If OPEC forecast is correct, then the world could face an oil supply shortage in 2021. Therefore, some of the members are asking for a greater production increase.