In recent weeks, oil market participants have focused on the potential impact of the Omicron variant on demand and the expected surplus in early 2022, apparently forgetting about one major bullish driver next year—the inability of the OPEC+ group to pump as much oil as its rising monthly targets call for.
Estimates of a large oversupply in the first quarter of 2022 have mainly rested on the assumption that OPEC and its non-OPEC allies led by Russia would be able to deliver the planned 400,000 barrels per day (bpd) increase in overall production each month.
The OPEC+ group, however, has been undershooting its collective production targets for months and will likely continue to do so in the months ahead. African OPEC members lack the capacity and investments to boost production, Russia is estimated to pump and export lower volumes than its quota, and the biggest Arab Gulf producers have the means to raise output but at the expense of shrinking their spare production capacity, which accounts for the majority of the spare capacity globally.
The alliance’s inability to deliver on its production targets – with some estimates putting the overall output at around 650,000 bpd-730,000 bpd below the collective quota – is set to support oil prices next year, analysts say. This underproduction could even become a major upside for oil next year, especially if Omicron’s dent to global oil demand remains limited to jet fuel as the most recent estimates and analyses show at the end of 2021.
Saudi Arabia, the United Arab Emirates (UAE), and Kuwait have accounted for most of the export growth within the OPEC+ group in recent months, according to an analysis by energy research service HFI Research in Seeking Alpha.
OPEC and Russia have raised their combined crude oil exports by around 1.8 million bpd since June, HFI Research found, based on data from Kpler. Yet, all of that export growth and more – 2 million bpd – has come from Saudi Arabia, the UAE, and Kuwait.
Per the data HFI Research has compiled from Kpler, two of the largest producers in the pact – OPEC’s No. 2 Iraq and the leader of the non-OPEC group, Russia – have seen their respective crude oil exports drop in the past month.
Related: Global Oil Demand Could Reach New Heights In 2022
These estimates suggest that the big GCC producers Saudi Arabia, Kuwait, and the UAE are supporting the OPEC+ group’s export growth, in the meantime reducing their spare production capacity, setting the stage for higher oil prices and heightened volatility in case of sudden supply disruptions.
If OPEC+ continues to unwind its cuts, the first quarter of 2022 will see a surplus of 1.7 million bpd, and the oversupply could grow to 2 million bpd in the second quarter of 2022, the International Energy Agency (IEA) said in its latest Oil Market Report for December.
“Much needed relief for tight markets is on the way, with world oil supply set to overtake demand starting this month,” the IEA noted.
Yet, the assumptions of the agency, and of other forecasters and analysts, take into account the expectation that OPEC+ will deliver on its planned output increases each month. Which the group hasn’t been doing for months.
Declining spare capacity in the Middle East and the continued underproduction from African OPEC producers are set to support oil prices next year, especially if Omicron turns out to be less destructive for demand as initially feared. Cancellation of flights has hit jet fuel demand once again, but overall, demand for other oil products globally seems to hold resilient despite record surges in COVID cases in many countries.
In Asia, road traffic has been heavier in December than in November, data from Apple’s mobility statistics cited by Bloomberg showed.
In the United States, “implied oil demand on a 4-week basis just hit an all-time high for this time of the year,” HFI Research noted on Wednesday after the EIA reported a draw of 3.6 million barrels for the week to December 24.
If global oil demand proves resilient through the Omicron wave and rises further as expected in 2022, OPEC+ struggling to pump to targets will support oil prices next year.
By Tsvetana Paraskova for Oilprice.com
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However, one thing OPEC+ isn’t going to do is to be pushed into a situation of glut or a deficit in the market. That is what will govern its decisions on production.
It is true that some members of OPEC+ can’t meet their production quotas but their underproduction would be more than offset by those who can. It is equally true that OPEC+’s spare production capacity could dwindle to 2.0 million barrels a day (mbd) or even much less once it has reinstated all the production cuts it made in April 2020 during the height of the pandemic. If needed, Saudi Arabia could dig deeper into its stored oil to offset shortages with help from Russia.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London