Yesterday, OPEC and its partners led by Russia agreed To increase their combined oil production by 100,000 barrels per day in September. Reports indicate that the decision follows calls from the United States and other major consumers for more oil. However, an additional 100,000 barrels per day probably won’t be enough to drive prices down much more.
The production increase agreement followed a deal to add about 430,000 barrels per day each month through August this year to reverse the deepest production cuts in history, which were implemented in 2020 and totaled 9.7 million barrels per day. This comes after a decision taken in June to increase the original amount of 432,000 barrels per day to 648000 bpd.
Once again, this decision is attributed to the consuming countries led by the United States, which has repeatedly called on OPEC to pump more oil so that prices fall. The problem is that only two OPEC members have the capacity to pump more oil than they are pumping now and 100,000 b/d may remain on paper like 648,000 b/d.
Commodity analysts from Standard Chartered have expected that OPEC and its OPEC+ partners will do the bare minimum in response to calls for more production. This decision to add 100,000 barrels per day to joint production can be seen as just that bare minimum showing they are doing something to respond to consumer concerns about supply but not so much as lower prices.
Because of the fragile balance between doing something successful and doing too much, oil markets are likely to remain tight for at least the next two years, analysts Stan Chart said in the latest commodities roadmap. The good news for consumers is that next year may bring lower prices due to demand dynamics.
Stankert estimates that oil demand in the current quarter has fallen by 100,000 barrels per day, while OPEC production has increased over the past year by 2.2 million barrels per day. The cartel and its partners will have to be careful about their next steps to avoid destroying demand through excessive prices and a reputational stigma for blocking barrels to keep prices high.
However, prices have rebounded somewhat in the past few months, the report notes. At the moment, Brent crude is trading a few dollars above levels seen before Russia invaded Ukraine. This indicates that the market has absorbed the war premium, and the basics are back in the driving seat.
The biggest problem appears to be that most OPEC members lack the means to increase production above current levels, even if they wanted to do so. In July, the last month for which official data from OPEC is available, the group produced 234,000 barrels per day more than it did in June.
This was close to OPEC’s original quota under the OPEC+ agreement, which was 253,000 barrels per day. That was the month when OPEC was actually supposed to produce more than its original allocation of 253,000 bpd. However, that did not happen, and few who followed the OPEC agreement closely were surprised, given Nigeria’s chronic problems with pipeline theft and cuts or the political situation in Libya, which has caused regular production outages for years.
Venezuela and Iran have been exempted from the OPEC+ production cuts, but they have other problems preventing them from making the most of their oil: US sanctions. Angola, like Nigeria, has a chronic oil problem, and is in a state of underinvestment in the face of depleting fields, and Iraq also needs the funds 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. It remains to be seen whether this increase is sufficient to drive oil prices much lower than they are now and will depend greatly on demand developments in the coming months.
By Irina Slough for Oilprice.com
More Top Reads from Oilprice.com: