Global oil markets will be very volatile in the coming months if news from major OPEC producers about production capacity constraints turns out to be true. OPEC will meet again in the coming days to discuss its export agreements, while today the oil group presents its Annual Statistical Bulletin (ASB) 2022. While the media is likely to focus on rumors over the next 24 hours about a possible change in the export strategy of OPEC + the real focus must be on whether the oil cartel is able to significantly increase its production. For years, OPEC producers have been the main producers on oil markets. With an estimated spare capacity of over 3-4 million barrels per day, Saudi Arabia and the UAE have always been considered a last resort in the event of a major crisis in the oil and gas markets. During the previous global oil oversupply, nothing seemed to threaten the oil market, even when major conflicts broke out in Libya, Iraq or elsewhere. However, the reopening of the global economy after COVID-19 has restored market fears that leading oil producers, including the United States and Russia, are unable to supply adequate market volumes. The heads of OPEC Saudi Arabia and the UAE are currently looking to increase production to historically high levels and reduce oil prices. Russia’s war against Ukraine, which removes a possible 4.4 million barrels a day of crude oil and products in the coming months, has thrown this problem of spare capacity into sharp relief.
A possible doomsday scenario could emerge in the oil markets this week, based not only on OPEC +’s export strategies, but also due to intensified internal turmoil in Libya, Iraq and Ecuador. Possible other political and economic upheavals are also occurring in other producers, while shale in the United States still shows no signs of a significant increase in production in the coming months.
Global oil markets have long believed that OPEC has enough free production capacity to stabilize markets, with Saudi Arabia and the UAE simply having to turn on their taps. However, there is no real evidence to suggest that OPEC has increased production capacity in the short term. A research note by Commodity Bank commodity analyst Tobin Gori has already noted that the two OPEC leaders produce in the short term. At the same time, UAE Energy Minister Suhail Al Mazrui put even more pressure on oil prices as he said the UAE was producing almost maximum capacity based on its quota of 3.168 million barrels per day (bpd) under an agreement with OPEC. and his allies. This comment may still indicate that there is spare capacity in Abu Dhabi, but remarks were made after French President Emmanuel Macron told US President Biden during the G-7 summit that not only the UAE produces with maximum production capacity, but also that Saudi Arabia has only another 150,000 bpd of spare capacity.
Macron said UAE President Mohammed bin Zayed (MBZ) had told him the UAE had maximum production capacity, claiming that Saudi Arabia could increase production by another 150,000 barrels a day. Macron also said that Saudi Arabia will not have huge additional capacity in the next six months. However, the official data for the two OPEC producers contradict this story. Saudi Arabia produces 10.5 million barrels per day, with an official capacity of between 12-12.5 million barrels per day. The UAE produces about 3 million barrels per day, claiming to have a capacity of 3.4 million barrels per day. The reserve production of the two countries is still officially planned to be about 3.9 million barrels per day combined. However, most analysts have questioned these figures for years.
Looking at OPEC + ‘s own production goals, the group has not been producing at agreed levels for months. During the upcoming energy dialogue on the Middle East and North Africa-Europe in Jordan, Al Mazrui of the UAE said OPEC + was operating at 2.6 million barrels a day less than its production target. This means a potential market shortage, which could increase further if internal shocks lead to a further reduction in production. For July-August, OPEC + agreed to increase production by another 648,000 barrels per day, which would mean that the overall reduction in production during the COVID-19 pandemic of 5.8 million barrels per day was restored. It remains very uncertain whether OPEC + can reach this level in the coming weeks or not.
The pressure will intensify in the coming days, as al-Mazrui’s remarks seem to condemn allegations of a shortage of spare capacity, but as always, “where there is smoke, there is fire.” A possible shortage of spare production capacity or no availability at all, combined with the expected force majeure of the Libyan NOC in the Gulf of Sirte and the suspension of oil production in Ecuador (520,000 bpd) in the coming days due to anti-government protests, is likely to lead to soaring prices. of oil.
There is still some optimism in the markets about a real collapse in supply and demand, as high inflation and a possible slowdown in the global economy could lead to lower demand. So far, however, this optimism has not materialized at all, demand is still increasing, although gasoline and diesel prices exceed historical price levels. The Chinese economic recovery, global natural gas shortages and higher temperatures in the coming weeks, combined with the normal peak in demand due to the driving season in the US and the EU, appear to raise oil prices.
The future of OPEC is at stake if vacant production capacity is really over. For years, analysts (myself included) have warned of a lack of upstream investment worldwide. This has already led to lower production capacity of independent oil companies, like most IOCs, and for national oil companies the situation seems to be similar. Although Saudi Aramco, ADNOC, and some others have maintained their investment levels up (and down the chain) over the past decade (even during COVID), other major OPEC producers have seen declining investment budgets or even full-scale crises. Most OPEC producers can still increase their total production, but only for a limited period of time. Where most spare capacity is short-term, in part to avoid stock damage in the long run, the current oil crisis is a much longer-term problem. Western sanctions against Russia, combined with existing sanctions against Venezuela and Iran, will hurt markets for years to come.
There is no quick fix to the current oil crisis, and even lifting sanctions against Venezuela or Iran will not lead to a significant increase in volume. At the same time, increased political interference in the West in the already struggling market will also hit volumes. The growing call in the US, UK and EU for an unforeseen tax on oil and gas companies will not only limit further investment at the top of the chain, but will also lead to higher pump prices. Consumers will not feel any positive effects on prices and can expect ever-increasing energy bills in the coming months.
No OPEC statements over the next two days will be able to allay market concerns. OPEC’s future depends entirely on its strength to stabilize markets. At present, the cartel does not appear to have any options. Without new oil production hitting markets soon, OPEC leaders MBZ and Crown Prince Mohammed bin Salman must try to maintain the illusion of spare capacity. If the free production capacity is found to be below 1.5-2 million barrels per day, the future of both OPEC and the oil markets will be bleak.
By Cyril Widdershoven for Oilprice.com
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