Yesterday, OPEC and its partners led by Russia agreed to increase their combined oil production by 100,000 bpd in September. Reports note that the decision follows calls from the U.S. and other big consumers for more oil. However, 100,000 additional barrels daily will probably not be enough to lower prices much further.
The production increase agreement followed a deal to add about 430,000 bpd every month until August this year to reverse the deepest production cuts in history, implemented in 2020 and totaling 9.7 million barrels daily. It also follows a decision made in June to boost the original 432,000 bpd to 648,000 bpd.
Once again, this decision was attributed to consuming countries led by the United States, which repeatedly called on OPEC to pump more oil so prices would go down. The problem is that only two OPEC members have the capacity to pump more oil than they are pumping now and that 100,000 bpd might remain on paper just like the 648,000 bpd.
Commodity analysts from Standard Chartered had predicted that OPEC and its partners in OPEC+ would do the minimum in response to calls for more production. That decision to add 100,000 bpd to combined production could very well be seen as just this minimum that shows they are doing something to respond to consumer concern about supply but not so much that prices tank.
Because of the fragile balance between doing something that works and doing too much, oil markets appear likely to remain tight for the next two years, at least, the StanChart analysts said in their latest commodity roadmap. The good news for consumers is that next year may bring lower prices due to demand dynamics.
Demand for oil in the current quarter may have fallen by 100,000 bpd, StanChrt’s estimates show, while OPEC production over the past year has increased by 2.2 million barrels daily. The cartel and its partners would need to be careful about their next steps to avoid both demand destruction through excessive prices and a reputation stain for withholding barrels to keep prices high.
Yet prices have more or less normalized in the last few months, the report notes. Right now, Brent crude is trading just a few dollars above levels seen before Russia invaded Ukraine. This suggests the market has absorbed the war premium, and fundamentals are back in the driving seat.
The big problem, then, appears to be most OPEC members’ lack of means to boost production above current levels, even if they want to do it. In July, the latest month for which there is official OPEC data, the cartel produced 234,000 bpd more than it did in June.
This was close to the original quota for OPEC under the OPEC+ agreement, which was 253,000 bpd. And that was the month when OPEC was actually supposed to produce more than its original 253,000-bpd allocation. Yet it didn’t, and few of those who have been following the OPEC deal closely were surprised, given Nigeria’s chronic problems with pipeline theft and outages or Libya’s political situation, which has been causing regular production outages for years.
Venezuela and Iran have been exempted from the OPEC+ production cuts, but they have other problems that prevent them from making the best of their oil: U.S. sanctions. Angola, like Nigeria, has a chronic oil problem, which in its case is lack of investments in the face of field depletion, and Iraq, too, needs money to produce more oil.
So, whatever increase in oil production comes from OPEC will come from Saudi Arabia, the UAE, and possibly Kuwait. Whether such an increase would be enough to lead oil prices much lower than they are now remains to be seen and would overwhelmingly depend on demand developments in the coming months.
By Irina Slav for Oilprice.com
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