Yesterday, OPEC and its partners led by Russia he agreed increase its combined oil production by 100,000 barrels per day in September. Reports note that the decision follows calls for more oil from the US and other major consumers. However, an extra 100,000 barrels per day is unlikely to be enough to further lower prices.
The deal to raise production followed an agreement to add about 430,000 barrels a day each month until August this year to reverse the deepest output cuts on record, implemented in 2020 and totaling 9.7 million barrels a day. It also follows the June decision to raise the original 432,000 bpd to 648,000 bpd.
The decision was again attributed to consumer countries, led by the United States, which have repeatedly called on OPEC to pump more oil to keep prices down. The problem is that only two OPEC members have the capacity to pump more oil than they do now, and that 100,000 bpd can remain on paper as well as 648,000 bpd.
Commodity analysts at Standard Chartered predicted that OPEC and its OPEC+ partners would do the bare minimum in response to calls for more production. This decision to add 100,000 bpd to combined production could very well be seen as just this minimum, showing that they are doing something to respond to consumer supply concerns, but not so much that prices are falling.
Because of the delicate balance between doing something that works and doing too much, oil markets appear likely to remain tight for at least the next two years, StanChart analysts said in their latest outlook for commodities. The good news for consumers is that next year may bring lower prices due to demand dynamics.
Oil demand may have fallen by 100,000 bpd in the current quarter, StanChrt estimates show, while OPEC output rose by 2.2 million bpd over the past year. The cartel and its partners would have to be careful about their next moves to avoid both demand destruction from inflated prices and reputational tarnishing from holding back barrels to keep prices high.
Still, prices have more or less normalized over the past few months, the report said. Right now, Brent crude is trading just a few dollars above levels seen before the Russian invasion of Ukraine. This suggests that the market has absorbed the war premium and fundamentals are back in the driving seat.
So the big problem seems to be the lack of means by most OPEC members to raise production above current levels, even if they wanted to do so. In July, the latest month for which official OPEC data is available, the cartel produced 234,000 bpd more than in June.
This was close to the original quota for OPEC under the OPEC+ agreement that was 253,000 bpd. And that was a month when OPEC was actually supposed to produce more than its original allocation of 253,000 bpd. Yet that did not happen, and few who watched the OPEC deal closely were surprised, given Nigeria’s chronic problems with pipeline theft and outages, or the political situation in Libya, which has caused regular production outages for years.
Venezuela and Iran have been exempted from OPEC+ production curbs, but they have other problems preventing them from extracting the best from their oil: US sanctions. Angola, like Nigeria, has a chronic oil problem, in its case a lack of investment in the face of depleted fields, and Iraq also needs money to produce more oil.
So any increase in oil production that comes from OPEC will come from Saudi Arabia, the United Arab Emirates and possibly Kuwait. Whether such an increase would be enough to drive oil prices much lower than they are now remains to be seen and will largely depend on how demand develops in the coming months.
Irina Slav for Oilprice.com
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