Oil prices remain high as output from OPEC and others falls behind

Almost two years ago, the world’s oil producers brake hard and drastically cut production as the pandemic ravages economies around the world. This dramatic drop was accompanied by an implicit promise that when factories reopen and planes resume operations, the oil industry will also revive, gradually scaling up production to help economies return to pre-pandemic conditions.

That’s not exactly how it turned out. Oil producers are having a harder time increasing output than expected. Members of the OPEC Plus cartel, which agreed to cut production by about 10 million bpd in early 2020, are regularly falling short of their monthly output increase target.

“In many places, once output has fallen, it won’t be easy to get it back up,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based research firm. .

Output in the United States, the world’s largest oil producer, has also been slow to recover from a steep one million bpd drop in 2020, as companies and investors wary of committing money amid concerns about climate change and volatile prices. The Energy Information Administration forecast that US crude oil production in 2022, while rising, is likely to be half a million bpd below the 2019 average.

This lagging model of production globally has helped push oil prices to a seven-year high, fueling inflation, which has become a political issue in the United States and elsewhere. Brent crude, the international standard, is close to $84 a barrel, while West Texas Intermediate, the American benchmark, is selling for close to $82.

An extended period of time when more oil is consumed than pumped out has depleted the tanks at a low level. Investment in new drilling for new oil has also fallen to a multi-year low, although it is expected to increase this year. At the same time, demand is expected to pick up sharply, reaching pre-pandemic levels this year.

Martijn Rats, an analyst at investment bank Morgan Stanley, wrote in a recent note to clients: “The oil market appears to be heading for a period of little margin of safety.

The gap between the target announced by OPEC Plus, which accounts for almost half of the world’s oil production, and the actual output appears to be widening. The International Energy Agency, a forecasting group based in Paris, has pegged the shortfall of 19 OPEC Plus countries within its 650,000 bpd quota for November. Energy Aspects forecasts the deficit will be just over one million bpd this month, or 1% of world supply, and is likely to increase later this year.

That deficit could be problematic, because policymakers and some analysts may be overestimating how much oil the group can add.

“OPEC Plus is seen as the main source of additional supply,” said Bronze.

Of course, higher prices are likely to encourage a significant increase in shale oil production in the United States. The tightening market also provided an impetus for Washington to lift sanctions on Iran’s oil sales by reaching an agreement on Tehran’s nuclear program.

Forecasters differ on the oil outlook, with International Energy Agency says in its most recent monthly report in December that “much-needed relief to tight markets is on the way.” The Energy Information Administration has forecast that oil prices will fall by the end of the year.

However, oil extraction by countries like Nigeria and Angola has become the norm as their oil industries struggle. Many factors are causing production to decline in some countries, including political instability, outdated regulatory regimes, and pressure on international oil companies to rethink their investments to increase profits and reduce carbon emissions. That shift could freeze developing countries that depend on oil income.

“There are many basins that simply no longer matter,” said Gerald Kepes, president of Competitive Energy Strategy consulting. In the eyes of international oil companies, even a country like Nigeria, Africa’s biggest producer, “doesn’t cut back,” he added.

Oil giants have for decades courted Nigeria, investing billions of dollars, but output has dwindled. In November, the country was supposed to pump around 1.6 million bpd but missed its target by more than 300,000 bpd, according to the International Energy Agency.

A weld of problems lies behind the shortfall. Nigeria’s industry is struggling due to damage to infrastructure caused by oil thieves and others, problems that have worsened in recent months, according to the industry.

International companies including Shell, which has long been a major investor in Nigeria, are gradually reducing their presence in swampy areas where their installations are vulnerable. They are being replaced by smaller companies with less capital, analysts say.

Without investment in drilling technology and technology, even the best oil countries will see their output decline. A case in point is struggling Venezuela, where against a backdrop of industry neglect, production has fallen to a relatively small level, below a million bpd – less than a tenth of Saudi output. Arabia – despite claiming to have the world’s largest reserves, around 300 billion barrels.

Kuwait, an oil-rich country in the Persian Gulf, has seen its production capacity drop by about 18 percent in three years. Kamel al-Harami, a Kuwaiti analyst, said that the domestic industry “doesn’t have the experience and expertise to deal with aged oil fields” but public opinion opposes bringing in international companies.

According to analysts, even Russia, which has close ties to Saudi Arabia as a top producer in OPEC Plus, is close to reaching the short-term limit of what the country can afford. This can produce. On the other hand, Saudi Arabia produces about 10% of the oil on the world market and can produce much more.

“Most OPEC producers are becoming limited in capacity,” said Bill Farren-Price, director of intelligence at Enverus, an energy market research firm. “But Saudi Arabia is a different story – its need for aggressive oil market management is undiminished,” he added.

Every month since the pandemic hit, OPEC Plus members have met to come up with output quotas. According to the agreed schedule in July, the group plans to raise overall production by 400,000 bpd per month, although it is falling short of its target.

Affected by the price of gasoline, which jumped about 40% last year, the White House has relied on Saudi Arabia and its allies to go faster in opening throttling, but OPEC officials have so far remained silent. are not ready to lower the quotas of those who cannot meet their targets and reassign them to other countries.

“We have to keep what they have delivered,” Prince Abdulaziz bin Salman, Saudi Arabia’s oil minister, told journalists late last year. The alternative, he added, would be a monthly debate about “who gets what”.

Analysts say Saudi officials are reluctant to unilaterally increase output and risk breaking deals with other producers over which they have a lot of control. In addition, lagging countries are seen as a sneaky way to cut cartel output, helping the Saudis enjoy high prices while increasing their own output.

And time may not be on the side of the Biden administration and others pushing for more oil in the market. As producers reach the limit of what they can generate in the coming months, “it will become less and less impactful to ask OPEC to add more,” said Bronze. Oil prices remain high as output from OPEC and others falls behind

Fry Electronics Team

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