Global oil markets will be very volatile in the coming months if news from OPEC’s major producers about production capacity constraints will meet again in the coming days to discuss its export deals. In contrast, today’s oil group presents its Annual Statistical Bulletin (ASB) 2022. While the media for the next 24 hours will likely be focused on rumors of a possible change in OPEC+’s export strategy, the real focus should be whether the oil cartel can substantially increase its production. The OPEC producers have been the main swing producers in the oil markets for years. With a presumed spare capacity of more than 3-4 million bpd, Saudi Arabia and the UAE have always been viewed as a last resort in the event of a major crisis in the oil and gas markets. NNothingreaten the oil market during the former global oil boom, even when m during the former international oil boomajor conflicts arose in Libya, Iraq, or elsewhere. However, the reopening of the worldwide economy after COVID-19 has brought back fears that leading oil producers, including the US and Russia, cannot supply sufficient volumes to the market. OPEC kingpins Saudi Arabia and the UAE are now under scrutiny to bring production to historically high levels and lower oil prices. Russia’s war on Ukraine, which could see the removal of 4.4 million barrels of crude oil and products per day in the coming months, has sharply alleviated this spare capacity problem.
A possible doomsday scenario could emerge in oil markets this week, based not only on OPEC+ export strategies but also because of heightened internal turmoil in Libya, Iraq and Ecuador. Potential other political and economic crisis is also brewing among other producers, while US shale still shows no sign of a substantial production increase in the coming months.
Global oil markets have long believed that OPEC has enough spare production capacity to stabilize the markets, with Saudi Arabia and the UAE just opening their taps—however, no real evidence suggests suction capacity in the near term. A research note by Commonwealth Bank commodities analyst Tobin Gorey already noted that the two OPEC leaders are producing at short-term capacity limits. At the same time, UAE Energy Minister Suhail Al Mazrouei put even more pressure on oil prices. He stated that the UAE is producing near maximum capacity based on the quota of 3,168 million barrels per day (bpd) under the agreement with OPEC and its allies. That comment could indicate that some spare capacity is still left in Abu Dhabi. Still, the words were made after French President Emmanuel Macron declared to US President Biden at the G7 meeting that not only is the UAE at maximum production capacity. Production, but Saudi Arabia has only 150,000 bpd of spare capacity available.
Macron stated that UAE president Mohammed bin Zayed (MBZ) told him that the UAE has the maximum production capacity claiming that Saudi Arabia can increase production by another 150,000 bpd. Macron also claimed that Saudi Arabia would not have massive additional power for the next six months. However, the official figures from both OPEC producers refute this story. Saudi Arabia produces 10.5 million bpd, with an official capacity between 12-12.5 million bpd. The UAE produces about 3 million bpd and claims to have a total of 3.4 million bpd. The reserve production of the two countries is still officially planned to be about 3.9 million barrels per day combined. However, most analysts have questioned these numbers for years.
Based on OPEC+’s production targets, the group has not produced at agreed levels for months. Speaking at the Future Energy Dialogue in the Middle East, North North Europeo pe, in Jordan, the UAE’s Al Mazrouei said OPEC+ was falling 2.6 million barrels per day short of its production target. That means a potential shortfall in the market, which could widen further if internal turmoil causes production to fall further. For July-August, OPEC+ agreed to increase output by an additional 648,000 bpd, which would mean the overall output reduction during the COVID-19 pandemic has recovered from 5.8 million bpd. Whether OPEC+ can reach that level in the coming weeks remains very uncertain.
Pressure will mount in the coming days as Al Mazrouei’s comments appear to refute claims of a shortage of spare capacity, but as always, “where there is smoke, there is fire”. A possible lack of excess production capacity or availability combined with an expected force majeure of the Libyan NOC in the Gulf of Sirte and a suspension of Ecuador’s oil production (520,000 bpd) in the coming days due to anti-government protests. Are likely to lead to a spike in oil prices.
There is still some optimism in the markets about a genuine supply-demand crisis, as high inflation levels and a possible global economic slowdown could lead to lower demand. So far, however, that optimism has not materialized at all, as demand is still rising, even as petrol and diesel prices break historic price levels. The reopening of the Chinese economy, a global natural gas shortage, and warmer temperatures in the coming weeks, coupled with the normal peak in demand resulting from the driving season in the US and EU, all seem to be pushing oil prices up.
OPEC’s future is at stake if spare production capacity runs out. Analysts (including myself) have warned that a lack of global investment in global investment in upstream ready resulted in lower production capacity of independent oil companies, like most IOCs, and the situation for national oil companies seems similar. While Saudi Aramco, ADNOC, and a few others have maintained their upstream (and downstream) investments over the past decade (even during COVID), other major OPEC producers have faced dwindling investment budgets or large-scale crises. Most OPEC producers could still increase their total production, but only for a limited period. While most reserve production capacity is based on the short term, partly to avoid damage to the reserves over a long time, the current oil crisis is a much more long-term problem. Western sanctions against Russia and sanctions against Venezuela and Iran will hurt markets for years.
There is no quick fix to the current oil market crisis; even lifting sanctions against Venezuela or Iran will not lead to substantial volume gains. At the same time, increased Western political interference in the already struggling market will also hit volumes. Growing US, UK,, and EU call to impose a windfall tax on oil and gas companies will limit investment upstream and ander prices at the pump. Consumers will not feel any positive price effects and can expect a steadily rising energy bill in the coming months.
No statement from OPEC in the next two days will ease the concerns in the market. OPEC’s future depends entirely on its ability to stabilize the markets. At this point, there appear to be no options available to the cartel. With no new oil production coming to market soon, OPEC leaders MBZ and Crown Prince Mohammed bin Salman must try to maintain the illusion of spare capacity. If the excess production capacity turns out to be below 1.5-2 million bpd, the future of both OPEC and the oil markets will be bleak.