Energy Prospectus

RBC Capital Markets as of September 17, 2020

OPEC Press Conference: No One is Above the Law

Global Commodity Strategy and MENA Research

Today’s OPEC JMMC press conference did not produce any major production policy changes
beyond extending the grace period for making compensatory cuts to the end of December.
However, the Saudi oil minister HRH Prince Abdulaziz bin Salman doubled down on his pledge to
eradicate cheating and to force 100% conformity.

The Saudi Oil Minister warned the errant Ministers that: “attempts to outsmart the market will not
succeed and are counterproductive when we have the eyes, and the technology, of the world upon
us.” The surprise appearance of UAE’s oil minister HE Suhail Mazroui on the dais was widely
interpreted as a sign that even the Kingdom’s closest allies will face scrutiny — even if Prince
Abdulaziz insisted that all is well in the bilateral relationship and that the Emirati minister made an
entirely voluntary trip to Riyadh. The Saudi oil minister also refused to rule out any additional output
adjustments in response to eroding demand dynamics, insisting that the producer group would
remain vigilant and nimble. That said, the avowed Alan Greenspan fan opted against providing any
real forward guidance about production policy, insisting that he would keep market participants
guessing and on edge for the remainder of the year to thwart the short sellers.

As we noted last week, we think that price will ultimately be the key determinant of OPEC/Saudi
action. If prices move markedly lower, we think the sovereign producers would step in to safeguard
their domestic finances. Current prices remain well below the fiscal break-even levels of the vast
majority of OPEC+ producers and another extended stay in the $30s/bbl could imperil the political
stability of several key petro-states. At a minimum, we think that the organization will put on hold
plans to taper the cut down to 5.8 mb/d— and effectively put an additional 2 mb/d on the market
— when the entire group convenes again in December. It will be worth watching whether the
additional Saudi export volumes (which will be coming as domestic demand eases) put too much
strain on the market and trigger an early adjustment, especially if the compliance challenged
countries fail to make headway on compensatory cuts. On a final note, while the Russian oil minister
departed early, he mentioned in his opening remarks that a new national strategy document called
for Russian participation in OPEC+ to continue through 2035. With the specter of the spring price
war in the rear view mirror, Moscow seems intent on reaping the soft power benefits derived from
sitting at the top of the OPEC+ table.

On September 17 Reuters reported OPEC+'s key panel, known as the joint ministerial monitoring committee, pressed for better compliance with oil output cuts against the backdrop of falling crude prices as uncertainty reigns over the global economic outlook. The group warned that rising COVID-19 cases in some countries could curb energy demand despite initial indications of a decline in oil stocks. The panel did not recommend any changes to their current output reduction target of 7.7 million b/d, or around 8% of global demand. The panel pressed laggards such as Iraq, Nigeria and the United Arab Emirates to cut more barrels to compensate for overproduction in May-July while extending the compensation period from September to the end of December.

On September 17 Reuters reported Saudi Arabia's crude oil exports rebounded in July to 5.73 million b/d from a record low in June, official data showed on Thursday. At 4.98 million b/d, crude exports in June were the weakest on record, according to data from the Joint Organizations Data Initiative (JODI) stretching back to 2002. Output from OPEC rose by more than 1 million b/d in July as Saudi Arabia and other Gulf members ended voluntary supply cuts, on top of an OPEC-led deal to curb production. An easing of lockdowns and lower supply helped benchmark Brent crude hold above $40 a barrel throughout July after plunging to a 21-year low of $15.98 in April, though gains were kept in check by fears of a second wave of COVID-19. Meanwhile, the world's top oil exporter cut its October official selling price for the Arab Light crude it sells to Asia by the most since May.

On September 18 Reuters reported that the chairman of Libya's National Oil Corporation said that lifting the force majeure restrictions that have halted oil exports from the war-torn country depends on demilitarizing all oil facilities. The Chairman was quoted as saying, “In light of the current chaos and non-organized negotiations, force majeure can’t be lifted.”