OPEC+ fears second Covid-19 wave could lead to oil surplus in 2021

OPEC and its allies fear a prolonged second wave of the Covid-19 pandemic and a jump in Libyan output could push the oil market into surplus next year, according to a confidential document seen by Reuters, a gloomier outlook than just a month ago.

A panel of officials from OPEC+ producers, called the Joint Technical Committee, considered this worst-case scenario during a virtual monthly meeting on Thursday. In September, the panel had not seen a surplus under any scenarios it considered.

Such a surplus could threaten plans by OPEC, Russia and allies, known as OPEC+, to taper record output cuts made this year by adding 2 million bpd of oil to the market in 2021.

The Organization of the Petroleum Exporting Countries has not indicated any plan so far to scrap that supply boost.

"The earlier signs of economic recovery in some parts of the world are overshadowed by fragile conditions and growing scepticism about the pace of the recovery," according to the document used in the panel's monthly meeting in October.

"In particular, a resurgence of Covid-19 cases across the world and prospects for partial lockdowns in the coming winter months could compound the risks to economic and oil demand recovery," it said.

The document presented scenarios that included a base case that still showed a deficit in 2021 of 1.9 million barrels per day (bpd) on average, albeit less than the deficit of 2.7 million bpd forecast in the previous month's base case.

But under its worst-case scenario, the document said the market could flip into a surplus of 200,000 bpd in 2021.

This year, OPEC+ agreed to make record output cuts to support plunging prices as oil demand collapsed. It cut 9.7 million bpd from May, tapering that to 7.7 million bpd from August. From January, cuts are due to ease to 5.7 million bpd.

However, since the JTC met in September, Libyan output has climbed and a global rise in coronavirus cases has led to renewed restrictions on movement in some countries, weakening demand for crude.

OPEC-member Libya is exempt from any production cuts.

Under the document's worst-case scenario, Libyan production would rise in 2021 to as much as 1.1 million bpd, a source familiar with the details of the meeting said. Under its base case, Libyan output would be 600,000 bpd in 2021.

Under the worst-case scenario, OECD commercial oil inventories - a benchmark OPEC+ uses to gauge the market - would remain high in 2021 compared to the five-year average rather than starting to fall below that mark.

This scenario also sees a stronger and more prolonged second wave of Covid-19 in the fourth quarter of 2020 and first quarter of 2021 in Europe, the United States and India leading to a lower economic recovery, weakening oil demand.

Under the document's base case, OECD oil stocks are expected to stand slightly above the five-year average in the first quarter of 2021, before falling below that level for the rest of the year.

A ministerial OPEC+ panel, known as the Joint Ministerial Monitoring Committee (JMMC), will consider the outlook when it meets on Monday. The JMMC can make a policy recommendation.

Oil ministers from OPEC+ countries are scheduled to meet again on Nov. 30-Dec. 1.