OPEC Plus and other oil producers fail to meet demand

Nearly two years ago, global oil producers halted and drastically reduced production as the pandemic gripped global economies. The sharp decline was accompanied by an implicit promise that as factories reopen and planes return to the air, the oil industry will also rebound, gradually ramping up production to help economies return to pre-pandemic health. .

It doesn’t happen exactly like that. Oil producers are finding it harder than expected to increase production. Members of the OPEC Plus cartel, which agreed to cut production by about 10 million barrels per day at the start of 2020, are consistently well below their rising monthly production targets.

“In many places, once production has been cut, it’s not easy to bring it back,” said Richard Bronze, head of geopolitics at Energy Aspects, a London-based research firm.

Production in the United States, the world’s largest oil producer, has also been slow to recover from its million-barrel-a-day plunge in 2020 as companies and investors are reluctant to commit to oil. money due to climate change concerns and price volatility. The Energy Information Administration projects that U.S. crude oil production in 2022, while rising, is expected to average half a million barrels per day below 2019 levels.

This lagging global production pattern has helped push oil prices to seven-year highs, fueling inflation, which has become a political issue in the United States and elsewhere. Brent, the international standard, sells for nearly $84 a barrel, while West Texas Intermediate, the US benchmark, sells for nearly $82.

A prolonged period in which more oil was consumed than pumped drained tank farms to low levels. Investment in new drilling for new oil also fell to multi-year lows, although it is expected to pick up again this year. At the same time, demand is expected to grow strongly, reaching pre-pandemic levels this year.

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

The gap between the target announced by OPEC Plus, which accounts for almost half of world oil production, and actual production seems to be widening. The International Energy Agency, a Paris-based forecasting group, has pegged the deficit for the 19 OPEC Plus countries covered by quotas at 650,000 barrels a day for November. Energy Aspects predicts the shortfall will reach just over a million barrels a day this month, or 1% of global supplies, and will likely increase later in the year.

This shortfall could be problematic, as policymakers and some analysts may be overestimating how much additional oil the group can add.

“OPEC Plus was seen as the main place where the additional supply will come from,” Bronze said.

Of course, higher prices are likely to encourage a substantial increase in US shale oil production. The tight market is also prompting Washington to lift sanctions on Iranian oil sales by striking a deal on Tehran’s nuclear program.

Forecasters are divided on the outlook for oil, with the International Energy Agency saying in its latest monthly report in December that “much needed help for tight markets is on the way”. The Energy Information Administration has predicted that oil prices will fall later this year.

Yet the undervaluation of countries like Nigeria and Angola has become the norm as their oil industries struggle. A variety of factors are driving down production in some countries, including political unrest, outdated regulatory regimes and pressure on international oil companies to rethink their investments to increase profits and reduce carbon emissions. This change could leave developing countries dependent on oil revenues out in the cold.

“There are a lot of basins that just aren’t of interest anymore,” said Gerald Kepes, president of Competitive Energy Strategies, an advisory firm, referring to oil regions. In the eyes of international oil companies, even a country like Nigeria, Africa’s largest producer, “does not make a difference”, he added.

For decades oil industry giants have courted Nigeria, investing billions of dollars, but production has plummeted. In November, the country was supposed to pump about 1.6 million barrels per day, but missed that target by more than 300,000 barrels per day, according to the International Energy Agency.

A host of problems lurk behind the shortfall. Nigerian industry is plagued by infrastructure damage from 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 facilities are vulnerable. They are being replaced by smaller companies with less capital to spend, analysts say.

Without investment in drilling and technology, even the most well-endowed oil states will see their production decline. One example is troubled Venezuela, where, amid industry neglect, production has fallen to relatively tiny levels of less than a million barrels a day – less than a tenth of the world’s output. Saudi Arabia – despite claims that the largest reserves in the world, around 300 billion barrels.

Kuwait, an oil-rich state in the Persian Gulf, has seen its production capacity shrink by around 18% in three years. Kamel al-Harami, a Kuwaiti analyst, said domestic industry “lacks the experience and expertise to deal with old and aging oil fields” but public opinion is reluctant to bring in international companies.

Even Russia, which is roughly tied with Saudi Arabia as the top OPEC Plus producer, is near the short-term limit of what it can produce, analysts say. Saudi Arabia, on the other hand, produces about 10% of the oil on the world market and could produce more.

“Most OPEC producers are experiencing capacity constraints,” said Bill Farren-Price, director of intelligence at Enverus, an energy market research firm. “But Saudi Arabia is a different story – its appetite for active oil market management has not waned,” he added.

Every month since the pandemic hit, OPEC Plus members have met to set production quotas. According to a timetable agreed in July, the group plans to increase overall production by 400,000 barrels per day each month, even if it misses targets.

Stung by gasoline prices that rose about 40% last year, the White House leaned on the Saudis and their allies to speed up the opening of the gas, but OPEC officials n have so far been unwilling to lower the quotas of those unable to meet the targets and reallocate them to other countries.

“We have to keep what is allocated to them,” Prince Abdulaziz bin Salman, Saudi oil minister, told reporters late last year. The alternative, he added, would be a monthly debate over “who gets what”.

Analysts say Saudi officials do not want to unilaterally increase production and risk severing the arrangement with other producers that gives them so much control. Moreover, laggards serve as a stealthy means to reduce cartel production, helping the Saudis to take advantage of high prices while increasing their own production.

And time may not be on the side of the Biden administration and others demanding more oil from the markets. As producers reach the limits of what they can do in the coming months, “it will be less and less impactful to demand that OPEC add more,” Bronze said.

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