Global oil markets will be very volatile in the coming months if the news from major OPEC producers about production capacity constraints proves true. OPEC will meet again in the coming days to discuss its export agreements, while the oil group presents today its Annual Statistical Bulletin (ASB) 2022. While the media is likely to focus on rumors in the next 24 hours of a possible change in OPEC+’s export strategy, it should The real focus would be on whether or not the oil cartel is able to significantly increase its production. For years, OPEC producers were the main producers in the oil markets. With an assumed spare capacity of more than 3-4 million barrels per day, Saudi Arabia and the United Arab Emirates have always been seen as the last resort in the event of a major crisis in the oil and gas markets. During the previous global oil glut, it seemed that nothing could threaten the oil market, even when major conflicts emerged in Libya, Iraq or elsewhere. However, the reopening of the global economy after COVID-19 has brought fear back into the market that major oil producers, including the United States and Russia, are unable to supply sufficient volumes to the market. Saudi Arabia and the United Arab Emirates are now seen as OPEC leaders to increase production to historically high levels and lower oil prices. Russia’s war against Ukraine, which removed 4.4 million barrels per day of crude and products in the coming months, has eased this overcapacity problem.
This week, a possible doomsday scenario may emerge in the oil markets, dependent not only on OPEC+ export strategies but also due to the growing internal turmoil in Libya, Iraq and Ecuador. Other potential political and economic turmoil is also brewing in other producers, while US shale oil still shows no signs of a significant increase in production in the coming months.
Global oil markets have long believed that OPEC has enough spare production capacity to stabilize the markets, with Saudi Arabia and the United Arab Emirates only needing to open their taps. However, there is no real evidence to suggest that OPEC has increased existing production capacity in the short term. A research note by Commonwealth Bank commodity analyst Tobin Gorey has already indicated that the two OPEC leaders are producing within capacity in the near term. At the same time, UAE Energy Minister Suhail Al Mazrouei put more pressure on oil prices, saying that the UAE is producing near-maximum capacity based on its quota of 3.168 million barrels per day under the agreement with OPEC and. its allies. This comment may indicate that there is some spare production capacity remaining in Abu Dhabi, but these statements came after French President Emmanuel Macron told US President Biden during the G7 meeting that the UAE is not only producing at maximum production capacity, but also that Saudi Arabia has Only another 150,000 barrels of spare capacity are available.
Macron stated that UAE President Mohamed bin Zayed told him that the UAE is at its maximum production capacity while claiming that Saudi Arabia can increase production by another 150,000 barrels per day. Macron also claimed that Saudi Arabia will not have huge additional capacity over the next six months. However, official figures for both OPEC producers contradict this narrative. Saudi Arabia produces 10.5 million barrels per day, with an official capacity ranging between 12 and 12.5 million barrels per day. The UAE produces about three million barrels per day, claiming that its production capacity is 3.4 million barrels per day. Officially, surplus production in the two countries is still scheduled to be around 3.9 million barrels per day combined. However, most analysts have been skeptical of these numbers for years.
Given the OPEC+ production targets, the group has not produced at the levels agreed upon in months. At the Middle East, North Africa and Europe Future Energy Dialogue in Jordan, the UAE’s Al Mazrouei said that OPEC+ was 2.6 million barrels per day below its production target. This means a possible shortage in the market, which could increase further if internal turmoil causes a further decline in production. From July to August, OPEC + agreed to increase production by 648,000 barrels per day, which means the restoration of the total production cut during the Covid-19 pandemic of 5.8 million barrels per day. Whether or not OPEC+ will be able to reach this level in the coming weeks remains uncertain.
And the pressure will increase in the coming days, as Al Mazrouei’s statements seem to rebuke allegations of a lack of production capacity, but as always “wherever there is smoke, there is fire.” A possible shortage of spare production capacity, or no availability at all, coupled with the expected force majeure of the Libyan National Oil Company in the Gulf of Sirte, the suspension of Ecuador’s oil production (520,000 barrels per day) in the coming days due to anti-government protests. , is likely to lead to higher oil prices.
There is still some optimism in the markets about a real crisis between supply and demand, as high inflation levels and a possible global economic slowdown could depress demand. So far, however, this optimism has never materialized, and demand continues to grow, despite the fact that gasoline and diesel prices are breaking through historical price levels. The reopening of the Chinese economy, global natural gas shortages, and rising temperatures in the coming weeks, along with a normal peak in demand due to driving season in the US and EU, all appear to be driving oil prices higher.
The future of OPEC is at stake if spare production capacity actually runs out. For years, analysts (myself included) have been warning of a lack of upstream investment around the world. This has already led to a decrease in the production capacity of independent oil companies, like most international oil companies, and for national oil companies the situation appears to be similar. Although Saudi Aramco, ADNOC, and some other companies have maintained their level of upstream (and downstream) investments over the past decade (even during COVID), other major OPEC producers have experienced dwindling investment budgets or even large-scale crises. Most OPEC producers can still increase their total production, but only for a limited time. When most of the spare production capacity is short-term, in part to avoid damaging the reserves in the long run, the current oil crisis is a much more long-term problem. Western sanctions on Russia, along with existing sanctions on Venezuela and Iran, will hurt markets for years to come.
There is no quick solution to the current crisis in the oil market, even lifting sanctions on Venezuela or Iran will not lead to significant increases in volume. At the same time, increased Western political interference in an already faltering market will affect volumes as well. The growing call in the USA, UK and EU for an unexpected tax on oil and gas companies will not only constrain more upstream investments, but also drive up prices at the pump. Consumers will not feel any positive price effects and can expect a steady increase in energy bills in the coming months.
No comments from OPEC over the next two days will be able to remove concerns in the market. The future of OPEC depends entirely on its ability to stabilize the markets. At present, it appears that there are no options available to the cartel. Without new oil production reaching the markets soon, OPEC leaders Mohammed bin Zayed and Crown Prince Mohammed bin Salman must try to maintain the illusion of excess capacity. If spare capacity is revealed to be below 1.5-2 million barrels per day, the future for both OPEC and oil markets will be bleak.
By Cyril Widdershoven for Oilprice.com
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