Apocalyptic oil? We will live a very heavy week on the markets, amidst important announcements and doubts about the available capacity
Global oil markets will be highly volatile in the coming months if the news emerging from major OPEC producers about capacity constraints proves true. In the next few days, OPEC will meet again to discuss export deals, while today the oil group will present the Annual Statistical Bulletin (ASB) 2022. While in the next 24 hours the media will likely focus on rumors of a possible change in the strategy of OPEC + export, the real focus should be on whether or not the oil cartel is able to substantially increase its production. Oilprice analyzed the situation.
For years, OPEC producers have been the main producers of swing oil markets. With an alleged reserve capacity of over 3-4 million bpd, Saudi Arabia and the United Arab Emirates have always been seen as a point of last resort in the event of a major crisis in the oil and gas markets. During the previous period of the global oil crisis, it seemed that nothing could threaten the oil market, even when major conflicts emerged in Libya, Iraq or elsewhere. The reopening of the global economy after COVID-19, however, has brought back fears to the market that major oil producers, including the United States and Russia, are unable to supply adequate volumes to the market. We now look to Saudi Arabia and the United Arab Emirates, the main producers of OPEC, to increase production to historically high levels and bring down oil prices. Russia's war against Ukraine, which could steal 4.4 million bpd of crude oil and products in the coming months, has highlighted the problem of spare capacity.
A possible doomsday scenario on oil markets could emerge this week, based not only on OPEC + export strategies but also on increasing internal turbulence in Libya, Iraq and Ecuador. Possible other political and economic turmoil is also underway in other producers, while US shale still shows no signs of a substantial increase in production in the coming months.
Global oil markets have long believed that OPEC has enough spare production capacity to stabilize markets, with Saudi Arabia and the UAE only having to turn on the taps. However, there is no hard evidence to suggest that OPEC has increased production capacity in the short term. A research note from Commonwealth Bank commodity analyst Tobin Gorey has already found that the two OPEC leaders are producing at the limits of short-term production capacity. At the same time, UAE Energy Minister Suhail Al Mazrouei exerted even greater pressure on oil prices, stating that the UAE is producing almost at its maximum capacity based on the 3.168 million barrels quota. per day (bpd) provided for by the agreement with OPEC and its allies. This comment could still indicate that Abu Dhabi has some reserve capacity left, but the remarks were made after French President Emmanuel Macron told US President Biden at the G7 meeting that not only the UAE they are producing at their full capacity, but also that Saudi Arabia only has another 150,000 bpd of spare capacity available.
Macron allegedly said UAE President Mohammed bin Zayed (MBZ) told him that the UAE is at maximum capacity, while saying Saudi Arabia can increase production by another 150,000 bpd. Macron also said Saudi Arabia will not have huge additional capacity in the next six months. Official data from both OPEC producers, however, contradict this thesis. Saudi Arabia produces 10.5 million bpd, with an official capacity of between 12 and 12.5 million bpd. The UAE produces around 3 million bpd, claiming to have a capacity of 3.4 million bpd. The two countries' reserve production is still officially expected to be around 3.9 million bpd combined. But most analysts have questioned these figures for years, and if that weren't true, the markets would be in real trouble.
Looking at OPEC + production targets, the group hasn't produced at agreed levels for months. Countries like Nigeria have not reached production quotas for some time and Libya has even been exempted from quotas. Whether or not OPEC + will reach this level in the coming weeks remains very uncertain.
The pressure will increase in the coming days, as Al Mazrouei's remarks seem to disprove claims of a shortage of reserve capacity, but as always "where there is smoke, there is roast". A possible shortage of spare production capacity, or its unavailability, combined with an anticipated force majeure of the Libyan NOC in the Gulf of Sirte and the suspension of Ecuador's oil production (520,000 bpd) in the coming days due to anti-government protests will likely lead to a surge in oil prices.
In this situation, a decline in demand due to the recession caused by excessive inflation might even be welcome, because, at least, it would lead to a containment of prices in the short term. On the contrary, China's economic and productive recovery after Covid lockdown could create problems.
There is no quick solution to the current crisis in the oil market, even the lifting of sanctions on Venezuela or Iran will not lead to a substantial increase in volumes. At the same time, increased Western political interference in an already struggling market will also affect volumes. The growing demand in the United States, the United Kingdom and the European Union to impose a loss tax on oil and gas companies will not only limit further investments in the upstream, but also lead to higher prices at the pump. Consumers will not feel any positive effect on prices and can expect a steady increase in energy bills over the next few months.
No OPEC statement in the next couple of days will eliminate market concerns. The future of OPEC depends entirely on its power to stabilize markets, but this depends on the cartel's reserve capacity: if this is non-existent, the organization loses its pricing function. At the moment, there seem to be no options. available for the cartel. With no new oil production coming to markets soon, OPEC MBZ leaders and Crown Prince Mohammed bin Salman must try to maintain the illusion of reserve capacity. If reserve production capacity turns out to be less than 1.5-2 million bpd, the future of OPEC and the oil markets would be bleak.
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The article Apocalyptic oil? We will live a very heavy week on the markets, between important announcements and doubts about the available capacity comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/petrolio-apocalittico-vivremo-una-settimana-pesantissima-sui-mercati-fra-annunci-importanti-e-dubbi-sulla-capacita-disponibile/ on Wed, 29 Jun 2022 08:00:53 +0000.