OPEC Meeting Delay Triggers Crude Price Decline, But Recovery Sentiment Still Strong

However, IHS Markit is concerned about deepening U.S./China rift: File Image/PixaBay

The Organization of the Petroleum Exporting Countries (OPEC) and its allies postponing a meeting to decide whether to extended output cuts led to a second day of losses for oil prices on Tuesday, although the impact was minimal in the face of optimism about OPEC as well as for the impending dissemination of Covid vaccines.

Brent ended the session down 46 cents, or 1 percent, at $47.42 per barrel, while West Texas Intermediate settled down 79 cents, or 1.7 percent, at $44.55.

Helima Croft, global head of commodity strategy at RBC Capital Markets, said of OPEC's announcement that it would meet on Thursday, “The group will probably find some face-saving compromise, with a short extension being the most likely outcome followed by a phased production return.”

But she added, “Nonetheless, this latest fracas does not bode well for collective cohesion in 2021 as vaccine optimism abounds and producers anticipate a strong recovery.”

Abdelmadjid Attar, president of OPEC and energy minister for Algeria, told the cartel that the “immense challenges” caused by the pandemic would likely persist in 2021, but that the global economy will return to growth by an estimated at 4.4 percent, with oil demand growth at or around 6.1 million barrels per day (bpd).

OPEC's curbs are scheduled to taper to 5.8 million bpd from January, but everything from lockdowns in Europe to rising infection rates in the U.S. have caused some members to call for a three month extension of the current 7.7 million bpd curbs.

Cornelia Meyer, an independent energy analyst, echoed the sentiment of some dissenting OPEC members by remarking that “It is hard to keep up morale and entice people to keep swallowing a bitter pill when [vaccine] relief seems close”; but Ehsan Khoman, head of MENA research and strategy at MUFG, countered that  “Our base case remains that the group will err on the side of caution and heed the market’s anxieties stemming from the virus resurgence on both sides of the Atlantic."

Meanwhile, Dan Yergin, vice chairman of IHS Markit, characterized the oil market at the end of 2020 as "really a struggle right now between … the vaccine rally in prices and the coronavirus impact on demand; that’s what’s at the heart of the battle that’s going on right now with OPEC and non-OPEC.”

In terms of the crude market's health, Yergin is especially concerned of Washington's proposal to add China's national offshore oil and gas producer, CNOOC, to a defence blacklist, pointing out that "We have a spiral going on now where instead of talking about engagement and collaboration and constructive relationship, it's great power competition, strategic rivalry, peer competitors."

Still, Yergin was somewhat optimistic about the future, noting that “Even though work patterns will have changed, jet travel will change, I think we’re going to see demand come back to what it was in 2019 sometime in 2022, 2023.”