The latest from Vienna is that Russia and Saudi Arabia are leaning towards the aggressive end of the suite of options under consideration, but as always, the negotiations remain fluid. Reuters said that Saudi Arabia and Russia could push a 1.5-million-barrel-per-day increase as a negotiating tactic in order to get the rest of the group to sign on to increases of around 500,000 to 700,000 bpd. In fact, the Wall Street Journal reported that Saudi Arabia was shopping a 500,000-bpd increase to fellow OPEC members this week.
Some sort of increase seems a foregone conclusion, so the next question is whether or not the group can deliver. Saudi Arabia remains the lone country that can quickly add very large volumes of oil. Russia has taken on a role as a sort of unofficial co-chair of the OPEC+ group with Saudi Arabia, but it isn’t clear that Russia can actually add large volumes of oil in short order.
Russia wants 1.5 mb/d of additional output from the group, but Russia itself might only be able to call upon small volumes of idle capacity. The exact amount has “become a critical question affecting the stability of global oil markets," according to IHS Inc. "This is new territory for them, they’ve never had production that has been deliberately held back," Matthew Sagers, managing director at IHS, told Bloomberg.
Russia might only be able to add between 100,000 and 300,000 bpd over the course of a few months. "We got a range of 100,000-300,000 b/d as their potential upside but I think it will take time to bring on the upper level," said Chris Midgley, head of S&P Global Platts Analytics. Related: Uncertainty Looms Large Over Latin American Oil
According to S&P Global Platts, Rosneft could add about 100,000 bpd within two months. Gazprom could add about 34,000 bpd within a month or two. Overall, Russia could conceivably bring back 300,000 bpd, but it would take six months or so to accomplish that. "To implement the OPEC+ cut, Russian producers reduced the amount of new wells drilled and delayed some greenfields, for example Trebs and Titov," Christian Boermel, senior analyst for Wood Mackenzie, told S&P Global Platts. "It took Russia six months to cut 300,000 b/d and we assume that a similar timeframe is required to ramp up production again."
The estimates vary. The IEA is not as optimistic, estimating that Russia could add only 155,000 bpd by the end of the year, while Goldman thinks Russia could add 500,000 bpd.
Saudi Arabia has a much greater capacity to boost output on short notice. The Kingdom says it could ramp up to about 12.5 mb/d of capacity, roughly 2.5 mb/d higher than current levels. But that rate of production has never been attempted and some question the reliability of that claim. Obviously, OPEC+ is not considering such a massive increase in output, but it is instructive to consider the absolute upper limit. And if Saudi Arabia can’t actually produce that much, and its total spare capacity is much lower, then an increase of 500,000 bpd to 1 mb/d over the next year or so would take a significant chunk out of spare capacity.
Goldman Sachs estimates that the OPEC+ group could only really bring about 1.3 mb/d of output online over the next 12 months.
That would leave the oil market dangerously thin on spare capacity. “If we see any further disruptions in the market, OPEC will have used their supply bullets and find themselves short of spare capacity, setting the stage for much higher prices,” Bastien Declercq, head of CSC Commodities in London, told Bloomberg. Related: Russia Gears Up To Boost Oil Production In July
The problem is that the disruptions seem to be multiplying. We have known for a while about the rapid declines in Venezuela, plus the market is already baking in some losses from Iran. But around 400,000 bpd just went offline in Libya because of militant attacks. The duration of the outage is still unknown, but it has yet to be priced into the market. If the disruption is sustained for a lengthy period of time, it would wipe out a significant portion of the increases that OPEC+ is considering.
Meanwhile, even as the additional supply satiates the market in the near-term, the reduction of spare capacity to historically low levels would only put more pressure on 2019 and beyond. “The reduction in spare capacity will trigger more volatility in oil prices,” Antoine Rostand, president of Paris-based oil data company Kayrros, told the Wall Street Journal. “Any disruptions such as Libya will push up spot prices immediately.”
The result could be a return to contango, in which near-term prices trade at a discount to longer-dated futures. “The lack of spare capacity could push oil into contango in the longer-term as contracts further out jump,” Richard Fullarton, founder of the hedge fund Matilda Capital Management Ltd., said in a Bloomberg interview. “Stronger demand and potentially higher costs of U.S. production may also support the curve.”
By Nick Cunningham of Oilprice.com
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I am surprised that nobody including Saudi oil minister, Mr Khalid Al-falih, spoke of a supply gap in the global oil market until President Trump requested Saudi Arabia two weeks ago to ramp up oil production to replace any shortfall in Iranian oil exports as a result of the forthcoming US sanctions. Now all and sundry are talking about the need for OPEC to increase its production. Even an OPEC technical panel is suggesting that the oil market could comfortably absorb a production increase without sending oil prices plummeting.
How could this be true when the global oil market has not completely eliminated the glut in the market and prices are still hovering around $73-$75 a barrel and not beyond $80 where they should be if they are to enable OPEC members to balance their budgets.
Furthermore, nothing has changed in the global oil market in the last two weeks. Venezuela’s slowly-declining oil production and Libya’s erratic production have been constant factors in the global oil market for ages and have been factored in by the global oil market so there is nothing new there. Also claims that Iran could lose more than 500,000 barrels a day (b/d) of its oil exports as a result of US sanctions are but a charade for reasons I explained so many times in the past.
And while President Trump’s brewing trade war with China could cast a shadow over the global economy, China will manage to send its exports to other destinations and it will still need vast amounts of oil to keep its economy functioning.
And while Saudi Arabia claims that it can produce at least 12.5 mbd if needed, that claim is yet to be tested by market circumstances. Saudi Arabia’s production never exceeded 10.4 mbd before. Still, the Saudis claim they have a spare capacity of some 2 mbd though no one has really assessed it though many analysts take Saudi word for granted.
Saudi oil production peaked many years ago with depletion rates in its major oilfields including Ghawar estimated at 5%-7%. Ghawar accounts for more than 50% of current Saudi production. A depletion rate of that magnitude means that Saudi Arabia has to add annually some 500,000-700,000 barrels a day to maintain current oil production. This has not been happenings to all intents and purposes.
Still, Saudi Arabia as the de facto leader of OPEC will carry the day in the OPEC meeting and force a rise in OPEC production estimated at 300,000-600,000 barrels a day (b/d).
The Saudis should, however, be very mindful of the fact that if there a future collapse of oil prices in the future, their economy will be the most damaged as was the case with the 2014 oil price crash. If they breach the OPEC deal by forcing a production rise on OPEC, they risk losing any future support from the majority of OPEC members should there be a need for another production cut agreement.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London
If that is the case, KSA should not try to gain acceptance for an 'increase' in oil volumes, but propose to just 'replace' or 'make-up' the volumes of oil which has come offline since the 2017 agreement levels. Don't promote an 'increase' in crude production volumes, instead promote a 'replacement' for the crude oil volumes that have come offline since 2017.
If they can agree on a 'replacement' quota, that technically would not entail an 'increase' in crude supplies. If they want to address world oil demand increases, that is a totally different item to agree upon, and most likely would not be approved by fellow OPEC countries that do not want any increase in production quotas. Regards.