OPEC was in decline. Soon he might be more powerful than ever

But with the demand for crude rising as the impact of the pandemic wears off, that no longer appears to be the case.

OPEC +, which brings together the Organization of the Petroleum Exporting Countries and allies like Russia, is once again showing dynamism. the group refusal of membership calls from US President Joe Biden to increase production – a move that would have helped ease the upward pressure on gasoline prices – precipitated the move by the US and other major energy-consuming countries last week of tap into strategic oil reserves.
The episode showed the group’s market power, even as the energy transition accelerates. Demand for oil could peak soon if countries meet their net-zero emissions targets, but OPEC producers and Russia are quickly noting that this will not go away completely. As part of the climate commitments made through in early October, the world is is still expected to need 75 million barrels of oil per day by 2050, according to the International Energy Agency.

“This is definitely a time when OPEC and the OPEC + group as a whole see that they have a lot of influence in the oil markets,” said Richard Bronze, head of geopolitics at consultancy Energy Aspects.

When it comes to the dynamics of oil prices, it is difficult to predict the future. Political or weather events can trigger a boom or fuel a huge decline. The pandemic adds to the uncertainty, especially as scientists rush to assess the Omicron variant. Evidenced by the price crash of over 20% in recent days which has brought US oil futures down to levels last seen in August.

Omicron could put OPEC and Russia on its back. And analysts believe their influence could wane further over the next year as US producers regain ground. But over time, their strength could increase – especially as the climate crisis prompts others to cut back on production, either because of donor pressure or in anticipation of falling demand.

“The only producers who have made the necessary investment [to sustain long-term production] are Saudi Aramco and Adnoc, ”said Ellen Wald, author of the book“ Saudi, Inc., ”referring to state oil companies in Saudi Arabia and the United Arab Emirates. “It tilts the scales towards OPEC. “

OPEC time

OPEC + had another opportunity to demonstrate its influence on Thursday by announcing its latest political decision. He decided to proceed with caution, sticking to a long-term plan to gradually add production cut at the start of the pandemic.

The group is moving forward with production increase of 400,000 barrels per day in January, even as the Omicron variant fuels fears of oversupply.

Brent crude futures, the global benchmark and US oil both fell after the announcement. After a strong recovery at the start of the year, oil prices have fallen by more than 20% since the end of October.

The move by Saudi Arabia, Russia and other countries has come under close scrutiny, in part because oil production in the United States has yet to recover to pre-pandemic levels.

For most of the past decade, when oil prices soared, U.S. producers rushed to ramp up production, going into debt to pump out as much crude as possible. That is not happening this time around, as the oil companies prioritize returning money to shareholders and monitoring their results.

“There isn’t as much capital available as there was three, four or five years to get out, drill and grow,” said Anish Kapadia, head of energy at Palissy Advisors.

This gives OPEC more price leverage. It needs them to stay high, but not so high that US growers feel they have no choice but to restart production.

The group has only limited control over supply and demand. If the Omicron variant seriously shakes up economic activity, prices could plunge no matter what OPEC does. The full impact of the announcement by the United States, China, Japan, India, South Korea and the United Kingdom to put millions of barrels of oil on the market also remains to be seen. And some analysts think that while OPEC countries have a lot of oil in the ground, they don’t have the resources to extract it quickly.

Yet until production resumes in the United States, OPEC policies will remain a key driver of markets. And for now, the group seems determined to err on the side of caution, rather than risk that member countries that depend on oil revenues have to oversell.

Lasting influence?

American production is expected to resume next year. But the unusual mismatch raises questions as to whether a deeper, more permanent change is at play.

“If you take a step back, 80% of the growth in oil production in the 2010s came from the United States,” said Nikos Tsafos, energy expert at the Center for Strategic and International Studies. “If this machine is broken and we are not going to extract much more oil from the United States, our whole understanding of what the oil market looks like in the 2020s has to change.”

Here to stay or gone in 30 years?  At the heart of the fight for the future of the oil industry
The pressure on major oil and gas companies in Europe and the United States to rethink their strategies in light of the climate crisis is having an impact. In a report released earlier this year, the IEA found that large oil and gas companies were keeping their total oil and gas spending stable in 2021. Their share of world-wide exploration and production spending industry is now 25%, against nearly 40%. in the mid-2010s.

According to the American Petroleum Institute, the industry spent just $ 37.4 billion on capital projects in the second quarter of 2021, up from $ 68.7 billion during the same period in 2019. It This is the lowest spending on record for a quarter since 2008.

Players like Saudi Aramco, meanwhile, are striving to increase their production capacity, with a view to supplying oil to markets as long as there is demand.

“They still see huge demand in the developing world, and they still see huge demand for petroleum products,” said Wald, a non-resident senior researcher with the Atlantic Council Global Energy Center, noting the wide range of items that use petroleum as a component.

This underinvestment outside OPEC, as well as the new financial discipline among small shale producers, could have lasting consequences, she continued.

IEA data shows that OPEC and Russia’s share of oil production could drop from 47% in 2020 to 49% in 2030 if countries fully meet all of their pledged climate commitments. By 2050, OPEC and Russia are expected to account for 58% of production.

“Things can change, but there is such a deficit of investment that it will take time to recover,” said Wald. “This puts OPEC and Saudi Arabia in a good position.”

As always, however, the power of the group depends on politics. Much could depend on the ability of its members to continue to get along and maintain a cohesive game plan. The rifts between Saudi Arabia and Russia in March 2020 sent prices plummeting.

“[OPEC+] must act collectively, “Bronze said.” As soon as you get divisions or disagreements, those can really undermine the group’s ability to function and stick to decisions. “

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