If OPEC+ continues to fail in delivering its oil production targets amid rising demand and inventories at multi-year lows, oil prices will remain under upward pressure and are set for more volatility, the International Energy Agency (IEA) said on Friday.
The gap between OPEC+ output and its target levels surged to as much as 900,000 barrels per day (bpd) in January, the IEA said in its closely watched Oil Market Report for February.
This year’s estimated global growth rates remain largely unchanged, the agency said, expecting world oil demand to rise by 3.2 million bpd this year and reach 100.6 million bpd, as restrictions to contain the spread of COVID ease.
At the same time, the level of industry stocks globally continues to shrink.
OECD industry oil stocks declined by a steep 60 million barrels in December, led by large draws in middle distillates across all regions, the IEA estimates. Oil inventories in developed economies were 355 million barrels lower than a year ago and at their lowest in seven years. Preliminary data for January show OECD industry stocks declined by another 13.5 million barrels.
Global oil supply rose by 560,000 bpd to 98.7 million bpd in January, mostly from countries outside the OPEC+ pact, while OPEC+ continued to show “chronic” underperformance versus targets.
“If the persistent gap between OPEC+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices. But these risks, which have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” said the IEA.
The trouble with spare capacity is that only two countries, Saudi Arabia and the United Arab Emirates (UAE), have such. Iran could also add 1.3 million bpd to the market if the nuclear talks are successful and the U.S. sanctions on Iranian oil exports are removed.
“If OPEC+ cuts are fully unwound, the bloc could increase output by 4.3 mb/d. Of course, that would come at the expense of effective spare capacity, which could fall to 2.5 mb/d by the end of the year and end up held almost entirely by Saudi Arabia and, to a lesser extent, the UAE,” the agency said.
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By Tsvetana Paraskova for Oilprice.com
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And contrary to claims otherwise, OPEC+ has enough spare capacity to keep the oil market balanced in both 2022 and 2023. Beyond that, it urgently needs to add more capacity. This means it has to start investing heavily in expanding capacity immediately as it normally takes up to 5 years before investment reaches fruition.
Moreover, implied threats by the Biden Administration to OPEC + to raise its production saying that 'all options are on the table' are meaningless and unenforceable. They take us back to 2008 when former US President George W Bush visited the late Saudi King Abdullah bin Abdulaziz to urge him to raise Saudi oil production to stem the rise of oil prices then. He returned to Washington empty-handed because Saudi-led OPEC didn’t have enough spare production capacity to prevent Brent crude from eventually hitting $147 a barrel in 2008.
The situation now is in many ways similar to 2008 but with two unique differences. The first is that the global oil market is in the most bullish state since 2014. The second is that the market is already in a super-cycle phase that could last ten years and could take Brent crude to $120 a barrel in the next few years.
We could expect the same outcome from the telephone conversation President Biden had this week with King Salman. Neither Saudi Arabia nor OPEC+ has enough capacity to stem the accelerating rise in oil prices.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London