Nearly two years ago the world’s oil producers slammed on the brakes and drastically cut production as the pandemic gripped the world’s economies. The abrupt pullback was accompanied by an implicit promise that the oil industry would also recover as factories reopened and flights resumed to normal. This would allow economies to return to pre-pandemic health.
It isn’t exactly turning out that way. It’s becoming harder for oil producers than they had expected to increase their output. Members of the cartel OPEC Plus have agreed to reduce output by approximately 10 million barrels per day in early 2020. However, they are consistently falling short of their rising monthly production targets.
“In a lot of places, once output has been reduced, it is not easy to bring it back,” said Richard Bronze, the head of geopolitics at Energy Aspects, a London-based research firm.
Production in the United States, the world’s largest oil producer, has also been slow to recover from its one-million-barrel-a-day plummet in 2020, as companies and investors are wary of committing money amid climate change concerns and volatile prices. According to the Energy Information Administration, U.S. crude oil production in 2022 will rise, but it is expected to average half a Million barrels per day less than 2019 levels.
This global trend of lagging production has pushed oil prices to seven-year highs, fueling inflation, which has become a political issue in the United States as well as elsewhere. Brent crude oil, the international benchmark, is selling at close to $84 per barrel while West Texas Intermediate is selling for $82.
Tank farms have been drained to low levels by a prolonged period in which more oil was consumed than pumped. Investment in new drilling for new crude oil has also fallen to multiyear levels, but it is expected to rebound this year. However, demand is expected grow strongly to reach prepandemic levels.
“The oil market appears to be heading for a period with little margin of safety,” Martijn Rats, an analyst at Morgan Stanley, the investment bank, wrote in a recent note to clients.
The gap between the target announced by OPEC Plus, which makes up nearly half of the world’s oil output, and actual output seems to be growing. The International Energy Agency, a Paris-based forecasting agency, estimated that the November shortfall in 19 OPEC+ countries was 650,000 barrels per day. Energy Aspects predicts that the deficit will be just over 1 million barrels per day this month, or 1% of world supplies. It will likely increase later in the year.
This deficit could be problematic because analysts and policymakers might be underestimating the amount of oil the group can add.
“OPEC Plus has been viewed as the main place that additional supply is going to come from,” Mr. Bronze stated.
Higher prices are likely to encourage substantial increases in US shale-oil production. The tight market also gives Washington an incentive to lift sanctions on sales of Iranian oil by reaching a deal on Tehran’s nuclear program.
Forecasters are split on the oil outlook, with the International Energy Agency saying in its most recent monthly report in December that “much-needed relief for tight markets is on the way.” The Energy Information Administration has forecast that oil prices will fall later this year.
As their oil industries struggle, countries like Nigeria and Angola continue to undershoot. Production in some countries is being affected by political turmoil, outdated regulatory regimes, and pressures from international oil companies to rethink investments to increase profits and decrease carbon emissions. This could mean that developing countries who depend on oil income are left in the cold.
“There are many basins that are simply of no interest anymore,” said Gerald Kepes, president of Competitive Energy Strategies, a consulting firm, referring to petroleum-bearing regions. In the eyes of international oil companies even a country like Nigeria, Africa’s largest producer, “doesn’t make the cut,” he added.
For decades, the oil industry has been attracted to Nigeria by its giants, who have invested billions of money. However, production has been declining. According to the International Energy Agency (IAEA), the country was supposed produce 1.6 million barrels of oil per day in November. However, it failed to meet that target by more then 300,000 barrels per hour.
This shortfall is due to a host of problems. Nigeria’s industry is plagued by damage to infrastructure caused by oil thieves and others, problems that have worsened in recent months, according to the industry.
Shell, an international oil company, is gradually reducing its presence in areas of swampy land where they are most vulnerable. Analysts say they are being replaced with smaller companies that have less capital to invest.
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Even the most well-endowed oil countries will see their production decline if they don’t invest in drilling technology and drilling. A case in point is troubled Venezuela, where amid neglect of the industry production has shrunk to relatively minuscule levels of less than one million barrels a day — less than a tenth of Saudi Arabia’s output — despite claims to have the world’s largest reserves, about 300 billion barrels.
Kuwait, a rich Persian Gulf oil state has seen its production capacity drop by 18 percent in the past three years. Kamel al-Harami, a Kuwaiti analyst, said that the domestic industry “does not have the experience and the expertise to deal with old and aged oil fields” but that public opinion is resistant to bringing in international companies.
Analysts say that even Russia, which is tied with Saudi Arabia as the largest producer in OPEC Plus is near the short-term limit on what it can produce. Saudi Arabia, on the other hand, produces about 10 percent of the oil on the world’s market, and could produce more.
“Most OPEC producers are becoming capacity constrained,” said Bill Farren-Price, the director of intelligence at Enverus, an energy market research firm. “But Saudi Arabia is a different story — its appetite for active oil market management is undiminished,” he added.
Since the pandemic, OPEC Plus members have met each month to determine output quotas. The group agreed to a schedule in July and plans to increase the overall output by 400,000 barrels per day each month, even if they miss the targets.
Stung by gasoline prices that have risen about 40 percent in the last year, the White House has leaned on the Saudis and their allies to go faster in opening up the throttle, but OPEC officials have so far been unwilling to lower the quotas of those who aren’t able to hit targets and reassign them to other countries.
“We have to keep what they are allotted,” Prince Abdulaziz bin Salman, the Saudi oil minister, told journalists late last year. The alternative, he added, would be a monthly debate over “who gets what.”
Analysts say Saudi officials don’t want to unilaterally increase output and risk busting up the arrangement with other producers that gives them so much control. In addition, the lagging countries serve as a stealthy way to trim the cartel’s output, helping the Saudis enjoy high prices while increasing their own production.
The Biden administration and others pushing for more oil on the market may find that time is not on their side. As producers reach the limits of what they can make in the coming months, “it is going to be less and less impactful to demand that OPEC add more,” Mr. Bronze stated.
Source: NY Times