In a fragile oil market, OPEC has difficult decisions to make

In a fragile oil market, OPEC has difficult decisions to make

The world’s major oil producers are facing tough times: prices are lower, the health of the global economy is uncertain and, even as the Organization of the Petroleum Exporting Countries attempts to cut production, supplies to others producers, particularly the United States, are growing.

It’s no wonder the group postponed its end-of-year meeting. Initially scheduled for last weekend in Vienna, the meeting is now scheduled for Thursday, unless further postponement. The agenda – whether to cut production further and by how much – is likely to be unpalatable for many of the 23 members.

The price of Brent crude, the global benchmark, has fallen to around $82 a barrel, from a high of more than $96 this year and $128 at the start of the Ukraine war.

It fell even as producers in OPEC Plus, a larger group that includes Russia, cut output, but it appears unlikely that the coming months will give oil producers any respite from the squeeze.

After three years of recovery from the pandemic and a sharp increase in oil demand, appetite is expected to slow in 2024. The main reasons: China, which accounted for three-quarters of global demand growth in 2023, faces to an economic slowdown. Overall economic expansion is expected to be rapid while more efficient energy use and a growing number of electric vehicles reduce oil consumption. With production expected to increase outside OPEC Plus, there will be little need to increase output from the producer group in early 2024 or, perhaps, longer, analysts say.

Market weakness is pushing Saudi Arabia, the de facto leader of OPEC Plus, to continue and perhaps even deepen production cuts. Saudi Arabia and Russia, for example, could renew in the new year the quarter of a million barrels per day and 300,000 barrels per day that they agreed to last summer. Russia’s reduction applies to its oil exports.

Some smaller OPEC producers, including Nigeria and Angola, are being asked to approve lower production limits that more closely reflect their recent production history, while the United Arab Emirates received a higher level.

“There is a good chance that the group will agree to some sort of additional cuts,” Richard Bronze, head of geopolitics at Energy Aspects, told a research firm.

At the same time, analysts predict that drilling in countries like the United States, Guyana and Brazil – which are not members of OPEC – will likely increase their production enough to meet additional global oil consumption which will emerge in 2024 and, perhaps, later. years.

The International Energy Agency projects global demand will increase by a modest 930,000 barrels per day, an amount that could easily be covered by increases from producers outside OPEC Plus.

Amid the pressure on OPEC, the United States is thriving as an oil producer, accounting for 80% of the increase in global supply in 2023, according to the IEA. The agency, which includes natural gas liquids in its calculations, estimates that in October the United States pumped 19.8 million barrels per day, almost as much as the combined total of Russia and the United States. Saudi Arabia, the two largest producers.

Operators outside OPEC generally have an interest in producing oil quickly to recoup their investments and make profits.

“The pipeline of non-OPEC projects alone appears sufficient to meet global demand growth over at least the next few years,” Morgan Stanley analysts wrote in a recent research note.

Iran – an OPEC member that is exempt from cuts because its oil exports have been subject to Western sanctions – is increasing its supplies. Thanks to what analysts say is a more relaxed enforcement of these sanctions, Iran has increased its production by 30% to 3.1 million barrels per day since 2021, according to figures from the producers group.

Of course, events could confuse the forecasts. The situation would be very different if the now-suspended fighting in Gaza spread to the entire Middle East, which has some of the world’s largest producers around the Persian Gulf as well as the sea lanes that transport their oil to customers.

But for now, oil traders see little chance of a broader conflict.

OPEC’s influence on markets is weakened when non-OPEC countries are in a better position to meet growing demand. OPEC Plus has been forced into a series of cuts over the past year to support prices and avoid a buildup of oil reserves in tank farms.

The production cut helped push prices of benchmark Brent crude above $90 a barrel in September, but OPEC Plus paid the price in lost sales. The Saudis, who have suffered the brunt of the cuts, produce only nine million barrels per day, almost two million less than a year ago.

These cuts also diminish oil revenues that are key to the Saudi government’s budget and its ambitions to invest in non-oil businesses, including the LIV professional golf circuit and Newcastle United, an English Premier League soccer team. .

This month, for example, Saudi Aramco, the national oil company, partly blamed falling oil sales on a 23% drop in third-quarter net profit, a $10 billion drop from to the previous year.

“We are approaching the point where quotas are becoming unrealistically low,” said Gary Ross, chief executive of Black Gold Investors, an investment firm.

Saudi Arabia is not the only producer to be put under pressure. Abu Dhabi, the oil power at the heart of the United Arab Emirates, has called on international partners to increase its production capacity to five million barrels per day, but must nevertheless keep its production at 3.2 million below the quota established in June by 2024.

For now, analysts say, OPEC members appear to be trying to stay united. After all, $80 a barrel is preferable for producers to the market collapse that could occur if the Saudis turned on the taps completely, as they did recently in 2020, when prices fell more than 9% in one day, to around $45 a day. barrel.

Failing to reach an agreement is “a risk that OPEC Plus cannot afford to take,” said Homayoun Falakshahi, an analyst at Kpler, a research firm.

Avatar photo

David B.Otero

Related Posts

Read also x