Lackluster OPEC quota hike won’t solve tight oil market
Yesterday, OPEC and its Russian-led partners agreed to increase their combined oil production by 100,000 bpd in September. Reports note that the decision follows calls from the United States and other big consumers for more oil. However, an additional 100,000 barrels per day is unlikely to be enough to drive prices down much further.
The production increase agreement follows an agreement to add around 430,000 bpd each month until August this year to reverse the largest production cuts in history, implemented in 2020 and totaling 9.7 million barrels per day. This also follows a decision made in June to increase the original 432,000 bpd for 648,000 bpd.
Once again, this decision was attributed to consumer countries led by the United States, which repeatedly called on OPEC to pump more oil to bring prices down. The problem is that only two members of OPEC have the capacity to pump more oil than they currently pump and 100,000 bpd could remain on paper just like the 648,000 bpd.
Commodity analysts at Standard Chartered had predicted that OPEC and its OPEC+ partners would do the minimum in response to calls for increased production. This decision to add 100,000 bpd to combined production could very well be seen as that minimum that shows they are doing something to address consumer concerns about supply, but not so much that prices are falling.
Due to the delicate balance between doing something that works and doing too much, oil markets look likely to remain tight for at least the next two years, StanChart analysts said in their latest commodity roadmap. The good news for consumers is that next year could bring lower prices due to demand dynamics.
Oil demand in the current quarter may have fallen by 100,000 bpd, according to StanChrt estimates, while OPEC production over the past year has increased by 2.2 million barrels per day . The cartel and its partners should be careful about their next steps to avoid both the destruction of demand by excessive prices and a reputational stain to hold back barrels to keep prices high.
Still, prices have more or less normalized in recent months, the report notes. Currently, Brent crude is trading a few dollars above levels seen before Russia invaded Ukraine. This suggests that the market has absorbed the war premium and fundamentals are back in control.
The big problem therefore seems to be the lack of means for most OPEC members to increase production above current levels, even if they want to. In July, the last month for which there is official OPEC data, the cartel produced 234,000 bpd more than in June.
This quota was close to the initial OPEC quota under the OPEC+ agreement, which was 253,000 bpd. And that was the month OPEC was expected to produce more than its initial allocation of 253,000 bpd. Yet that is not the case, and few who closely followed the OPEC deal were surprised, given Nigeria’s chronic problems with theft and pipeline failures or the political situation in Libya, which has been causing regular production outages for years.
Venezuela and Iran have been exempted from OPEC+ production cuts, but they have other issues preventing them from getting the most out of their oil: US sanctions. Angola, like Nigeria, has a chronic oil problem, which in its case is the lack of investment in the face of the depletion of deposits, and Iraq too needs money to produce more oil.
So any increase in oil production coming from OPEC will come from Saudi Arabia, the United Arab Emirates and possibly Kuwait. Whether such an increase would be enough to bring oil prices down from where they are now remains to be seen, and much of that will depend on how demand develops in the coming months.
By Irina Slav for Oilprice.com
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