With a recent spike in COVID-19 cases in the United States and Europe, companies across the world fear that this second wave will lead to an oil surplus. The concerns peaked further when oil prices dropped due to this fear on 16th October 2020, with Europe and the United States continuing to drag the demand as two of the world’s biggest fuel-consuming regions. Entities like OPEC also fear that the second wave of COVID-19 cases, as well as a push from the Libyan output, can push the market into surplus by next year.
A panel of OPEC+ producers, in a Joint Technical Committee, has considered the worst-case scenario during their monthly gathering on 15th October 2020. The panel, in October, stated that the earlier signs of economic recovery in some parts of the world are overshadowed by growing scepticism and fragile conditions about the intensity of the recovery. In September, the committee did not see a surplus in any scenarios it considered. This surplus, which may arise due to COVID-19’s second wave, is also threatening the plans of OPEC, Russia, and allies, together known as OPEC+, by tapering record output cuts made in this year by increasing 2 million BPD of oil in the market by the year 2021. Meanwhile, there has been no indication about any plan in order to scrap the supply boost by the Organisation of Petroleum Exporting Countries.
The panel’s main agenda of discussion was, in particular, a resurgence of COVID-19 cases across the world and prospects of partial lockdowns in the upcoming winter, which can become a compound risk to economic and oil demand recovery. The document presented by the OPEC+ panel presented scenarios that included a base case in which it still showed a deficit in the year 2021 of 1.9 million bpd on an average, albeit less than the deficit of the estimated 2.7 million BPD as previous month’s base case. But under its worst-case scenario, the document stated that the global market might fall into a 200, 000 BPD surplus by the year 2021.
Earlier this year, the OPEC+ decided to make a record output cut in order to support the plummeting prices as oil demand decreased. The company has cut 9.7 million BPD since May 2020, tapering that to 7.7 million BPD from the month of August. Meanwhile, from January, the cuts are going to ease up to 5.7 million BPD.
Since the Joint Technical Committee met in September, the Libyan output has significantly increased and a global rise in COVID-19 cases has led to renewed travel restrictions in various countries, weakening demand for crude. Since Libya is an OPEC-member, it has been exempted from any production cuts.
Under the worst-case scenario estimated by the OPEC+ panel, OECD commercial oil inventories- a benchmark OPEC+ uses to gauge the market – will be high in the year 2021 compared to the five-year average rather than decreasing below that mark.
The scenario also deals with a stronger and more prolonged second wave of coronavirus in the second half of 2020 and the first quarter to 2021 in Europe, the United States, and India, which will lead to a lower economic recovery, and thus weakening oil demand. Under the document given by the OPEC+ panel’s base case, OECD oil stocks are estimated to reach a bit above the five-year average in the Q1 of 2021, before falling lower than the estimated level for post-the first quarter.
While OPEC+ takes their necessary measures in order to deal with the plunging demand in oil prices due to the fear of second wave of COVID-19 outbreak, the European and the United States’ markets are also preparing for a significant downfall in the oil and gas demand.
Meanwhile, a ministerial OPEC+ panel, known as Joint Ministerial Monitoring Committee (JMMC), will be considering the entire outlook of the scenario in which they will determine the worst-case scenarios as well as the measures to deal with those scenarios on 19th October 2020 and again on 30th November 2020 and 1st December 2020. The committee is allowed to make policy recommendations.