LONDON: US pressure on OPEC + to pump more oil and cool scorching crude prices has highlighted a relatively new problem for the producer group: it doesn’t have much extra capacity to ramp up production faster , even if he wanted to.
The Organization of the Petroleum Exporting Countries and its allies, known as OPEC +, unwind record supply restrictions in 2020 when demand crunched, but not quickly enough for Washington which worries about near peak prices three years.
OPEC +, which includes Russia, has withstood pressure for faster hikes, sticking to its plan to gradually ramp up production to 400,000 barrels per day (bpd) every month since August, fearing that a faster increase does not lead to glut in 2022.
Yet OPEC + cannot even achieve these goals. According to the International Energy Agency (IEA), OPEC + production was 700,000 bpd below forecast in September and October, suggesting a tight market and high oil prices for longer.
In the past, OPEC’s small producers in Africa and even some larger ones in the Gulf could be expected to exceed the quotas set by OPEC when they needed the extra money, usually when the producers needed more money. oil prices were low.
But the drop in production investment caused by the pandemic and environmental pressure on oil majors, especially in poorer OPEC states, means that only three OPEC members – Saudi Arabia, the UAE and Iraq – have the additional capacity in place to ramp up supplies relatively quickly.
“Recent data confirms our long-held expectation that an increasing number of members are running out of available capacity,” consulting firm Energy Aspects wrote in a note.
PRESS FOR MORE
Under President Donald Trump, Washington urged OPEC + to cut production in 2020 when prices fell and threatened to crush the US oil industry. The group has accepted sweeping cuts of around 10 million barrels per day, a record 10% of global supply.
As demand rebounded faster than expected, President Joe Biden’s administration has repeatedly pressed OPEC + for more supply, fearing that high crude prices – Brent rose more than 50% up to ‘now this year – is stifling a global recovery.
“OPEC + remains deaf to political pressure to accelerate the increase in supply,” Energy Aspects said.
Unable to persuade OPEC + to pump more and facing low approval ratings ahead of next year’s midterm elections, Biden called on China, India, South Korea and Japan for a coordinated publication of oil stocks.
Yet such a decision is complicated by the mandate of the Paris-based IEA, which represents industrialized countries. According to its rules, reserves must be released to cope with shocks, such as wars or hurricanes, and not to correct prices.
âA release (of the shares) would only provide a short-term solution to a structural deficit and create clear upside risks to our 2022 price forecast,â Goldman Sachs wrote.
While rising crude prices may help boost supply, he said investments were hampered by environmental, social and governance (ESG) concerns and concerns about global warming, with banks charging more for loans. for oil than green projects.
âThe damage done to investors by the destruction of oil producers‘ capital over the past seven years is now compounded by inefficiencies in ESG allocation,â Goldman said.
According to its timetable for unwinding production restrictions, OPEC + will have officially implemented 3.8 million barrels per day of reductions on December 1. But, with some OPEC + members unable to increase production enough, the real reduction remains larger.
The IEA said Angola and Nigeria accounted for nearly 90 percent of OPEC + ‘s production deficit of 730,000 bpd in October.
Energy Aspects says it expects the OPEC + output gap “to steadily widen as quotas continue to rise.”
Even if OPEC + producers picked up the pace, it would reduce a cushion of available production capacity, which could alarm investors and push up prices if the world did not have enough additional capacity to cope with a shock. , according to industry experts.
“The unused capacity of the industry, currently 3-4 million bpd, reassures the market, but I fear the buffer (…) may decrease,” said Saudi Aramco CEO Amin Nasser, at the Nikkei Global Management Forum.
Saudi Arabia now produces nearly 10 million b / d but has never produced more than 11 million b / d for an extended period of several months, even though it says it has more capacity available. Russian producers such as Gazprom Neft said they were struggling to produce more.
The US shale industry, which has transformed the US from a net importer of crude into an exporter in recent years, could help ease price pressures by increasing production.
But the risks of rising prices remain, Russell Hardy, head of one of the world’s largest oil traders, Vitol, told a Reuters summit this month: “The possibility of a peak at 100 $ US a barrel is clearly there. “