The OPEC+ decision to forego a 1.9 million b/d increase in output was critical to propelling the global stock draw. Despite remarkable OPEC+ production restraint and a modest recovery in demand in the second half of 2020, the global stock draw since June has been moderate. As the chart below shows, ESAI Energy estimates that the stock build (crude and products) topped out in June at around 1.4 billion barrels (above end-2019 levels) and has fallen by about 400 million barrels to date. That leaves 1.0 billion barrels of inventory sitting in the market.
If OPEC had gone ahead with the scheduled 1.9 million b/d production increase in January, it would have stopped further stock draws (and even built stocks a bit) for a few months until refinery throughput picked up seasonally. By opting for a modest 500,000 b/d increase, the OPEC+ countries will encourage further stock draw. The countries also agreed to review the market each month and consider adding more crude oil to the market as fundamentals improve (i.e. stocks draw).
Later in the year, it will be easier to add production. In fact, if OPEC+ holds the line at the 500,000 b/d increase through March, then they probably can add the other 1.4 million b/d to the market fairly quickly (see chart) and still go a long way to eliminating the 2020 inventory overhang.
U.S. Shale has to Stay Under wraps
But that assumes U.S. shale does not have a sudden and dramatic recovery. With the announcement of new vaccines and their likely distribution to the general public in several countries by summer, if not earlier, economic recovery and oil demand will accelerate. Add to that the OPEC+ decision and prices will rise over the next several months. The response of U.S. shale to higher prices bears watching. We believe shale’s recovery is constrained by the expense of replacing declines and cautious investment/spending plans. If that remains the case, the OPEC+ countries will have room to add more crude to the market later in 2021 without sabotaging the stock draw. If shale producers shift gears and pour more cash into growing output, OPEC+ will need to be much more cautious.