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OPEC+ scenarios – Slow return of output amid fragmented COVID recovery

15 June 2021

The OPEC+ group of oil producers – the Organization of Petroleum Exporting Countries (OPEC) states and ten others – has started to reverse oil production cuts in expectation of a return to strong oil demand. To aid strategic planning for oil producers and consumers, we have set out three scenarios for the trajectory of the oil market this year.

OPEC+ will return 2m barrels per day (bpd) to global markets by the end of July, a sign of confidence that restrictive market management is no longer required.
However, the global recovery from the COVID-19 pandemic is likely to remain highly fragmented and fragile, with major downside risks to oil demand in the rest of 2021.
Each scenario considers a broad range of pandemic-related factors, underscoring how the oil market will remain volatile until 2022.

Our most likely scenario sees OPEC+ return to more active supply management after July as mixed pandemic outcomes imperil the global recovery in oil demand.
Our credible alternative scenario sees oil demand surge under accelerated deployment of vaccines, increased air travel and an absence of major outbreaks in oil consuming countries.
Our outlier scenario sees OPEC+ cohesion buckle under poor pandemic outcomes and the return of non-OPEC+ supplies into a tepid oil market.

High hopes for summer

With pandemic restrictions easing in several major Western countries and the summer holidays in the northern hemisphere, governments and oil producers are hopeful of a bumper season for oil demand.

On 1 April, OPEC+ confirmed a steady course of production increases for May to July based on a sunny outlook for oil demand. Together, the group will add 2m bpd of supply by the end of July, putting 25% of the oil they had been keeping shut-in back onto the market. Oil prices have modestly risen since, suggesting that a break from the intensive crisis management of 2020 may be well timed.

Clouds on the horizon

While there are legitimate reasons for cautious optimism in the medium-term, the rest of 2021 is likely to be characterised by high volatility for the oil market. Significant risks for the key oil producers and the most vulnerable oil-exporting states will persist. The ongoing fragility and asymmetry in the global appetite for fuels will complicate recovery planning.

Below, we break out three potential trajectories for the oil market until the end of 2021 arising from the pandemic and assess the challenges these will pose to OPEC+’s efforts at market management, as well as their implications for key producers.

In all three of our scenarios, OPEC+ – and Saudi Arabia in particular, as the group’s de facto leader – is likely to find oil market management for the rest of the year more challenging than the first half of the year. The group’s cohesion and compliance with its own targets will be tested by an uneven recovery over the next seven months, in which major uncertainties over both the demand and supply sides of the oil market will persist. Geopolitics will remain of primary importance, not least between the major OPEC+ oil exporting states – Saudi Arabia, the UAE, Iraq, Russia – for whom securing long-term market share in Asia is a strategic priority.

Market drivers

For each of these scenarios, several drivers will continue to shape oil supply and demand throughout the rest of 2021:

Travel restrictions and economic recovery in the advanced economies will vary significantly between different regions. New virus variants may trigger surges in cases in the second half of the year. Full reopening in advanced economies will not take place before 2022.
Emerging markets (EM) recovery remains even more uneven with several major consumers like India, Turkey and South-East Asian countries registering an increasing number of COVID-19 cases and introducing new restrictions. Several major non-OPEC+ oil suppliers – like Brazil and Colombia – will continue to experience high levels of infections in the coming months. With vaccination rates among most EMs lagging significantly behind their G7 peers, economic recovery will remain fragmented.
Global mobility trends will remain uneven and subject to rapid change. Domestic mobility within some advanced economies – like the UK and US – has been on a steep rise, fuelling a return to pre-pandemic levels of gasoline and diesel demand. International travel may see a temporary surge during the northern hemisphere summer – and this will rely on pandemic management going to plan in dozens of countries in North America and the EU – but it is much less clear if a sustained recovery will follow. Recovery in long haul commercial transport is likely to be gradual as supply chain dislocation continues and pandemic disruption persists in some regions.
While under our most likely scenario for the US-Iran nuclear negotiations, unsanctioned oil exports will not begin until 2022, Iran has expanded its sanctions-evading oil exports, primarily to China. These exports could increase further in the coming months, boosting unregulated oil supply to a key customer for several OPEC producers.
But any escalation of US-China tensions or new major security incidents in Middle East could drive oil prices higher and lead to temporary supply disruptions.
Compliance fatigue is starting to set in within OPEC+ as some more vulnerable suppliers seek to capitalise on higher prices and strong demand in China with greater export volumes. OPEC+ members with a history of poor compliance are unlikely to “repay” their dues in 2021 – leading to a high supply outlook.
US shale sector and US oil inventories remain an important consideration. Glutted with easy capital over the prior decade, US shale is now starved of it, but US progress with vaccinations and a positive growth outlook could accelerate US oil production and exports. A recovery in US shale would bring the need to defend market share back into consideration for OPEC+ members – especially Saudi Arabia and Russia.
The pandemic has brought new urgency to the energy transition in terms of both new prospective climate legislation and targets in major consumer markets, activist pressure, and capital flows away from traditional oil and gas activity and toward hydrogen and renewables. The acceleration of these trends, already firmly under way, will impact the scale of new investment in oil projects, potentially setting the scene for a shortage of oil supply in the years to follow.