OPEC and its allies have begun two days of meetings to debate a planned output increase, with expectations growing that the group will take a pause due to the threat from a new virus variant.

Ministers have been tight lipped about their intentions. One of the few to speak on the record about output policy, Iraqi Oil Minister Ihsan Abdul Jabbar Ismaael, said he would go along with whatever the group decides, whether its a supply hike or a pause. The majority of analysts and traders surveyed by Bloomberg expected the latter. 

The oil-market situation has reversed abruptly for the coalition led by Saudi Arabia and Russia. Throughout the past month, it faced pressure from major consumers like the U.S. to ramp up supplies more quickly. But after the omicron strain of COVID-19 sent crude crashing into a bear market, even a modest hike looks riskier. 

“The sudden appearance of a new and potentially more dangerous variant comes on top of new lockdowns,” Angolan Minister of Mineral Resources and Petroleum Diamantino Azevedo said at the opening session of the meeting on Wednesday. “In these uncertain times it is imperative” that OPEC+ “remain prudent in our approach, and prepare to be proactive as market conditions warrant.”

Oil futures are down 18 per cent in New York from the seven-year high reached in late October, when the recovery in global oil demand from the pandemic was stirring fear over the inflationary danger of surging fuel costs.

Frustrated with Riyadh’s refusal to speed up the revival of supplies halted during the pandemic, U.S. President Joe Biden co-ordinated a multinational release of more than 50 million barrels from emergency oil stockpiles, which was announced on Nov 23. 

The move prompted the 23-nation OPEC+ alliance to contemplate retaliating by calling off its next output increase, a 400,000 barrel-a-day tranche scheduled for January. When the new virus offshoot triggered a 12 per cent price rout in London on Friday, the group’s inclination toward a pause only hardened.

“This seems precisely the scenario that the pause option was designed for when the producer group announced their phased increase plan in July,” said Helima Croft, chief commodities strategist at RBC Capital Markets LLC.

LOOMING SURPLUS

Internal research by the Organization of Petroleum Exporting Countries suggests that world markets will be inundated with a 3 million barrel-a-day surplus during the first quarter. The excess could be as much as 4.8 million barrels a day in a more pessimistic scenario for demand.

With the outlook deteriorating, 18 of 25 traders, analysts and brokers in global survey by Bloomberg News predicted that OPEC+ will defer the production boost. That could certainly fit the ethos of Saudi Arabian Energy Minister Prince Abdulaziz bin Salman, who has repeatedly opted for caution in restarting halted production.

“Bottom line is, I expect OPEC+ to vigorously defend the supply balance they have worked hard to restore since last year,” said Vandana Hari, founder of Vanda Insights in Singapore.

Traders have even speculated that OPEC+ could reduce rather than increase supplies if crude prices -- which were up 4 per cent at about 6 a.m. in New York -- deepen their downturn. Such a move would run the risk of straining Riyadh’s already-fraught relationship with Washington. A recent U.S. diplomatic visit to the region suggests the two sides are seeking to cool tensions.

“We cannot entirely rule out that Prince Abdulaziz pulls another rabbit out of the hat given his affinity for surprise endings,” said Croft.

Proceedings began on Wednesday at 1 p.m. London time, when the 13 OPEC members convened online. That will be followed by a meeting of their analytical body -- the Joint Technical Committee -- a few hours after. The full OPEC+ alliance is due to gather virtually on Thursday.

“Iraq’s position toward continuing the release of 400,000 barrels a day, or pausing it, depends on what OPEC will decide in its meeting,” the country’s oil minister told the Iraq news agency.