Has OPEC+ reached its peak production capacity?

The OPEC+ production pact reached in April 2020 is set to end a month earlier than originally planned, in August 2022. The oil major, however, is already facing its next dilemma, which it faces from key alliance member Russia. , swept across Ukraine in February, sending oil prices above $100 a barrel.

War bounty and sanctions and bans on Russian oil in the West are keeping prices so high that inflation in developed economies, including the United States, has risen to its highest level in four decades, also driven by soaring food prices and supply renewal. – chain bottlenecks.

Oil between $110 and $120 a barrel is a major pain for consumers, and every policymaker, including US President Joe Biden, or a group of nations like the G7, is calling on OPEC+ to increase production.

The new dilemma for OPEC+ is whether to give in to mounting pressure and increase supply, thereby sacrificing the precious little spare capacity the world has. Alternatively, the group could stick to their guns, keep that spare capacity intact, and let an economic slowdown or recession solve the problem of soaring oil prices on the demand side.

The dilemma was front and center for analysts months ahead of this week’s meeting of the OPEC+ group, which is expected to approve a production increase of 648,000 bpd for August, as decided at the meeting in early June. At the time, OPEC+ decided to speed up its monthly oil production rises and redistributes the projected rise in September also into July and August, with increases of 648,000 bpd in each of the two months.

Thus, the outcome of the 9.7 million bpd cuts that began in May 2020 will have ended in August, a month earlier than expected two years ago. The final phase of the 2020 OPEC+ deal has attracted less attention than the big question: what’s next?

Major consuming nations are pushing for more supplies from OPEC+. Even President Biden – desperate to see relief for American drivers ahead of the midterm elections – has turned his back on Saudi Arabia and is expected to visit the Kingdom next month, which he says is during the election campaign. , would be treated as an “outcast”. declared during his presidency. But US gasoline prices at $5 a gallon and the loss of some Russian supply caused President Biden to reconsider and meet with Crown Prince Mohammed bin Salman.

Saudi Arabia, for its part, has little oil to spare. The Kingdom’s production target for August will be close to 11 million bpd. This is a level rarely achieved, and not for an extended period of time. The record Saudi production was in April 2020 at 11.550 million bpd, according to secondary OPEC sources. But it was a one-time event when Saudi Arabia and Russia engaged in a brief war for market share in March and April 2020 before clinching the deal for the record cuts amid global lockdowns. related to COVID and a collapse in consumption.

It is therefore uncertain whether the Saudis have the capacity to pump 11 million bpd or more sustainably. It is even less certain that the Kingdom can quickly tap into the 12.2 million bpd production capacity it claims to have. No one has ever seen Saudi Arabia produce more than 11.5 million bpd on average for an entire month.

Analysts believe that the Kingdom and the United Arab Emirates (UAE) are the only producers with some spare capacity. In reality, no one really knows. Earlier this week, French President Emmanuel Macron told President Biden that oil production from the United Arab Emirates and Saudi Arabia approaching its limit.

Nigeria, one of the OPEC members that has struggled the most with pumping to the target in recent months, also says spare capacity is low.

“Some people think the prices are a little high and expect us to pump a little more, but at the moment there is really little extra capacity,” Nigeria’s oil minister said last week. Timipre Sylva, quoted by Bloomberg.

Low levels of spare capacity in OPEC+ suggest that the group, or at least Saudi Arabia and the United Arab Emirates, may not want to increase production, even if they are able to. With higher production levels untested for an extended period, spare capacity will disappear and the world will be a blockade in Libya or a major hurricane in the Gulf of Mexico away from another major oil price spike.

By Tsvetana Paraskova for Oilprice.com

More reading on Oilprice.com:

Leave a Reply