If reports of production capacity restrictions coming from OPEC’s major producers prove to be accurate, the world’s oil markets will be extremely turbulent in the upcoming months.
OPEC is now releasing its Annual Statistical Bulletin (ASB) 2022, but it will meet again in the near days to review its export agreements. The main question should be whether or not OPEC+ is even able to significantly increase its production, even if the media will likely be focused on reports of a potential change in the export strategy in the next 24 hours.
The primary swing producers in the oil markets for many years have been OPEC members. Saudi Arabia and the UAE have always been viewed as the last choice in the event of a serious crisis in the oil and gas markets due to their presumable spare capacity of more than 3–4 million BPD. Even when big crises broke out in places like Libya, Iraq, or elsewhere during the previous global oil glut, it seemed like nothing could jeopardize the oil market. However, with the reopening of the world economy following COVID-19, there is once again a concern in the market that major oil producers like the USA and Russia won’t be able to supply the market with enough oil. Saudi Arabia and the UAE, the two OPEC leaders, are now expected to boost output to previously unheard-of levels and lower oil prices. This spare capacity issue has been brought to light by Russia’s war against Ukraine, which could result in the removal of 4.4 million BPD of crude and products in the upcoming months.
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Due to rising internal unrest in Libya, Iraq, and Ecuador as well as the OPEC+ export strategy, a potentially apocalyptic scenario in the oil markets may materialize this week. While potential political and economic unrest is also building in other producers, US shale has yet to demonstrate any indications that output will significantly increase in the upcoming months.
The UAE and Saudi Arabia only need to open their taps in order to stabilize markets, according to the long-standing belief in the global oil markets that OPEC has sufficient spare production capacity. However, there isn’t any solid proof that OPEC has an additional production capacity in place for the near future. The two top producers in OPEC have already been mentioned in a research paper by Commonwealth Bank commodities expert Tobin Gorey. As a result of the UAE’s quota of 3.168 million barrels per day (BPD) under the deal with OPEC and its allies, Suhail Al Mazrouei, Minister of Energy of the UAE, increased pressure on oil prices at the same time. Although the remarks were made after French President Emmanuel Macron had told US President Joe Biden during the G7 summit that Saudi Arabia only had another 150,000 bpd of spare capacity available, it is still possible that they signal that there is some spare capacity lingering in Abu Dhabi.
Macron said that Saudi Arabia can boost output by another 150,000 BPD despite Mohammed bin Zayed (MBZ) telling him that the UAE had reached its maximum production capacity. Additionally, Macron asserted that Saudi Arabia won’t have a significant increase in capacity over the next six months. However, the official statistics for both OPEC producers refute this claim. The stated capacity of Saudi Arabia is between 12 and 12.5 million bpd, although production is currently around 10.5 million BPD. While claiming to have a capacity of 3.4 million BPD, the UAE is currently producing about 3 million bpd. Officially, the combined spare output of the two nations is still expected to be close to 3.9 million BPD. However, the majority of analysts have been debating these numbers for years.
The organization has not been producing at the pre-agreed levels for months, according to OPEC+’s own output targets. Al Mazrouei of the UAE stated at the Middle East and North Africa-Europe Future Energy Dialogue in Jordan that OPEC+ was falling 2.6 million barrels per day short of its output goal. That implies a potential market shortage, which might worsen if internal unrest results in more output declines. OPEC+ agreed to boost production by an additional 648,000 BPD for the months of July and August, restoring the 5.8 million BPD total output reduction experienced during the COVID-19 period. It’s still extremely unclear whether OPEC+ will be able to achieve that level in the upcoming weeks.
Al Mazrouei’s comments appear to refute accusations of a shortage of spare capacity, but as always, “where there is smoke, there is fire,” thus pressure will increase over the next several days. Oil prices are projected to rise due to a potential scarcity or complete lack of spare production capacity, as well as the anticipated force majeure of Libya’s NOC in the Gulf of Sirte and the impending suspension of Ecuador’s oil production (520,000 BPD) due to anti-government protests.
Markets are still somewhat optimistic about a genuine shortage of goods since high prices and a potential recession in the global economy could reduce demand. To now, however, this optimism has not come to pass at all; demand is still rising despite gasoline and diesel prices that are smashing records. The resumption of the Chinese economy, a global natural gas scarcity, rising temperatures in the upcoming weeks, as well as the usual demand peak associated with the US and EU driving season, all appear to be driving up oil prices.
If spare production capacity actually has run out, OPEC’s future is in jeopardy. Analysts, including myself, have long expressed concern about a global dearth of upstream investment. Because of this, the production capacity of national oil firms and the majority of independent oil companies have already decreased. Despite Saudi Aramco, ADNOC, and a few other major OPEC producers maintaining stable upstream (and downstream) investment levels over the past ten years, including throughout COVID, other major OPEC producers have seen shrinking investment budgets or even major crises. The majority of OPEC producers might still raise their overall production, but only temporarily. While the majority of excess production capacity is short-term based, in part to prevent long-term damage to reserves, the current oil crisis is a much longer-term problem. Markets will suffer for years to come as a result of Western sanctions on Russia as well as those already in place against Iran and Venezuela.
There is no quick remedy for the current oil market problem, and even the easing of sanctions on Iran or Venezuela won’t significantly raise the volume. Additionally, increased political meddling from the West in the already troubled market will have an impact on volumes. In addition to limiting future upstream investments, the growing push in the USA, UK, and EU to impose a windfall tax on oil and gas corporations will also increase gas prices. In the following months, consumers should anticipate progressively rising energy costs rather than any favorable pricing benefits.
No OPEC announcements made in the next two days will be able to calm the market’s concerns. Future of OPEC is entirely dependent on the ability to maintain market stability. There don’t seem to be any alternatives available to the cartel right now. The leaders of OPEC, MBZ, and Crown Prince Mohammed bin Salman, must work to keep up the appearance of excess capacity if additional oil production does not soon enter the market. The future of OPEC and the oil markets would be gloomy if spare production capacity was found to be less than 1.5–2 million BPD.