Opec+ supply hikes should leave the market in deficit in '21, while a baseline change does not mean extra 1.6 million barrels per day (mbpd) from Apr'22, a BofA Global Research report said.
The oil prices have run into some turbulence post the latest Opec+ agreement as the market feared upcoming supply hikes and importantly the select members potentially flooding the market in 2022 with cumulative 1.6 mbpd additions to baseline production levels.
“We view this agreement as positive for oil in both short and medium-term for the following reasons:
*The 400 kbpd monthly supply additions should still leave the oil market in deficit at end of 2021.
*A change in baseline production levels does not mean an immediate 1.6 mbpd hike from April 2022 and will mostly redistribute quotas within Opec+.
*Production quotas may be adjusted on the way, while baseline production changes signal a general commitment from the key members,” BofA analysts said.
As part of the latest Opec+ agreement, Russia should be able to add ~100 kbpd each month starting from August (its ~25% share of Opec+ quota) and its baseline production level will be increased from April 2022 by 500 kbpd to 11.5 mbpd for crude only.
First, the reversal of 500 kbpd by the end of 2021 means oil production (crude + condensate) could reach almost 11 mbpd, just 3% below pre-covid levels. Should Opec+ continue to add 400 kbpd per month in Q1, Russia essentially would be allowed to fully restore production by the end of Q1 2022. Second, the baseline crude production of 11.5 mbpd practically means that Russia would have to produce roughly 1 mbpd above its historical maximum.
“We hence believe that Russia is highly unlikely to reach its baseline levels on a 1-2 year horizon considering flat capex levels over past couple of years. The next big growth project is not expected to come online before mid-2020s.”
Preliminary Bloomberg survey for Opec production shows that the group increased crude production by ~0.4 mbpd MoM in July as part of the Opec+ agreement to reverse 1.15 mbpd of the cuts through May-July. Saudi led an increase adding close to 0.5 mbpd which was offset by small declines in production across other producers. Iranian production was almost flat in July (+30 kbpd). Opec 10 compliance stays firmly >100%. Russia also added 40 kbpd MoM bringing its total production to 10.46 mbpd.
The European gas prices have rallied to all-time highs recently (~$500/mcm) as the gas market remains in deficit. A well-known combination of robust gas demand supported by power generation, low inventories and limited LNG inflows continue to drive prices up. European gas inventories are trending at the low end of the 5-year range and were utilised <60% as of end of July vs c.70% normal seasonal rate. LNG imports in Europe were down by 24% YoY vs covid-impacted shipments during summer 2020. At the same time, Gazprom increased its gas exports to non-CIS destinations by 11% YoY in July. The gas demand is strong on the domestic market too contributing to an overall Russian gas production growth of 14% YoY in July.
