During its next meeting, the Organization of the Petroleum Exporting Countries (OPEC) and its allies will likely agree to roll over their current oil production cuts through the first quarter of 2021. But in the second half of next year, the opposing priorities of its OPEC+ members will increase pressure to either change the structure of the cuts or accelerate their removal, leaving the global oil market oversupplied and oil prices relatively low for longer. OPEC is scheduled to hold a meeting to discuss production quotas on Nov. 30, while the broader OPEC+ block, which includes Russia, will meet on Dec. 1. 

• Under the current plan, OPEC+’s 7.7 million barrels per day (bpd) of collective cuts will remain in place through the end of 2020. From January 2021 through April 30, 2022, the cuts will then be relaxed to 5.8 million barrels per day. 
• Proposals to modify the plan include rolling over the cuts through the end of the first quarter and through the end of the first half of the year. 
• Reuters reported in early November that deepening the cuts had been discussed.

The meetings, which were scheduled months ago, come as the COVID-19 pandemic continues to hammer the oil market. Brent prices are now at an eight-month high, thanks in part to optimism surrounding early vaccines. But oil demand will probably not fully recover until 2022. COVID-19 has hit record levels in the United States, both in terms of hospitalizations and new cases. The U.S. epidemic is also expected to accelerate even further following the expected gatherings and travel during the Thanksgiving holiday. In Europe, a second surge of COVID-19 cases has also forced most of the Continent’s leading economies to reinstitute some level of lockdowns, further reducing global energy demand. Meanwhile, on the supply side, Libya’s production has increased from 100,000 bpd to 1.25 million bpd since the country’s warring factions signed a fragile oil agreement in September, undermining a seventh of OPEC+’s volumes of production cuts. 

• The resurgence of COVID-19 cases around the world recently prompted OPEC to cut its oil demand forecast for 2020 by 300,000 bpd compared with its October forecast. In its Nov. 11 Monthly Oil Market Report, OPEC also revised down its 2021 demand forecast by 300,000 bpd. 
• In its Nov. 12 Oil Market Report, the International Energy Agency (IEA) cut its oil demand forecast by 400,000 bpd for 2020 compared with its October forecast, and revised its 2021 demand forecast down by 300 bpd as well. The IEA also said that the vaccine would not result in the oil market recovering until well into 2021, which is probable given that it will take months until most of the developed world can administer the vaccine to its population (and much longer for the developing world). 
• U.S. President-elect Joe Biden’s intent to negotiate with Iran over its nuclear program upon taking office in January has also proven bearish for the oil market, as an interim compliance agreement with Tehran in exchange for potential suspension of U.S. sanctions could lead to an increase in Iranian oil exports in 2021.

Internal pressure in OPEC+ in the second half of next year will continue to build due to members’ differences over their need and willingness to continue cutting oil production under the current framework. Compared with Saudi Arabia, Russia has a significantly different view of the oil market and a much higher risk tolerance when it comes to accepting low oil prices. This means Moscow will prioritize expanding its market share over propping up prices once there’s an end in sight to the pandemic. Beyond Russia, most smaller OPEC producers, such as Iraq, are under deep financial stress due to low oil prices and thus may not be able to sustain deep production cuts long into 2021. In the past, Baghdad and other smaller producers have begrudgingly accepted production cuts that Saudi Arabia has proposed. But during the second half of 2021, the end of the OPEC+ agreement — and potentially the pandemic — will be more closely in sight. And during that time, smaller oil producers’ financial struggles may force them to either veto another OPEC+ agreement with proportional production cuts or return to significantly overproducing their quota levels. 

• On Nov. 23, Iraq’s deputy prime minister said it was no longer in the country’s interest to be part of an OPEC+ agreement that was a “one-size-fits-all-model” of proportional production cuts. 
• Baghdad has also approached its customers to prepay for about 130,000 bpd of crude oil, earmarked for delivery from July 2021 to June 2022. This represents more than half the level Iraq would be able to increase its oil exports by once cuts are tapered under the current plan. 

It’s unlikely that the OPEC+ agreement will fall apart altogether in 2021, but an acceleration of cuts is possible. Beyond April 2022, however, the differences in priorities and concerns among OPEC+ members could result in the collapse of the OPEC+ pact. Such a scenario could further dampen the oil markets’ recovery by resulting in a sudden surge of product, although Saudi Arabia would try to salvage some sort of an orderly exit to prevent this. The future of OPEC itself, meanwhile, may also increasingly come into question, as countries assess the benefits of continuing membership and curtailing production long-term to counter low oil prices amid not only the pandemic, but the broader energy transition away from fossil fuels.