Lean OPEC coffers, tenuous market conditions buoy oil
Though California motorists paying an average of $4.68 for a gallon of regular unleaded this week may not believe it, the world is not short of oil.
Members of the Organization of the Petroleum Exporting Countries have plenty of oil in the ground, and most could boost their output relatively quickly — if they wanted to. But it’s not in their financial interests to oversupply the market and knock down prices, at least not until high prices threaten demand.
Russia, a leader with Saudi Arabia of the OPEC+ alliance, also could send more oil to market, though oil and gas are the biggest moneymakers for the country’s budget and President Vladimir Putin likes high prices.
U.S. producers, which scaled back their investment and output during the 2014-2016 price crash and then executed even more cutbacks during the worst of the pandemic-induced collapse last year, are moving cautiously to drill wells.
They all have their reasons to hold back, none of which make it easier for energy consumers who have to pay the costs at the pump, heat their home or office, run their factory or buy any of the goods made from oil and natural gas. And it’s certainly not easier for government leaders who know that high energy costs can rile up their constituents.
So while all the players could add to global oil supplies, they are instead enjoying the high prices of $80-plus per barrel. Some need to keep the cash to rebuild their finances — and their shareholders’ confidence — after last year’s devastating losses, rather than write checks to invest in future production. And as the world moves toward a cleaner-energy future, some are hesitant of how much the oil and gas industry should invest in long-term projects.
It doesn’t help encourage producers to spend more on new oil when the U.S. Energy Information Administration and OPEC both forecast the world will turn to a supply surplus sometime next year, pushing down prices.
“We forecast that global oil stocks will begin building in 2022, driven by rising production from OPEC+ and the United States, along with slowing growth in global oil demand,” the EIA said on Nov. 9.
The agency said rising global production and slower demand growth could cut down the benchmark U.S. oil price to as low as $62 a barrel by the end of 2022.
The Paris-based International Energy Agency also sees supply coming back into balance and prices easing next year as OPEC+ alliance members continue their gradual return of production.
OPEC+ dramatically cut output in 2020 and has been slowly restoring the flow since late last year, despite calls from around the world — including from President Joe Biden — to open the taps wider and sooner. The alliance members don’t plan to fully restore production until late spring 2022.
Oil ministers from Saudi Arabia, the United Arab Emirates, Nigeria and other producing nations have publicly worried that another wave of COVID-19 infections and a corresponding economic slowdown could easily knock down energy demand — so why push more oil into the market now?
OPEC+ is cautious because it believes the oil market will switch to a surplus in early 2022, “due to demand softening,” UAE Energy Minister Suhail Al-Mazrouei said Nov. 8 at the Africa Oil Week conference in Dubai. There are still COVID-19 flare-ups, “so we have to be careful,” he said.
The collective response from OPEC+ is “go slow” until they are certain a full economic recovery from COVID-19 is underway.
Another, even more fundamental reason to go slow is that several OPEC members, including Angola, Nigeria and Kuwait, are unable to meet even their current allocations because of underinvestment in operations and exploration.
It appears the world can’t do much but wait on the oil-producing cartel’s monthly boost in production — 400,000 barrels per day added each month, a slow drip of less than 0.5% of global oil demand — or hope that the economic stress of high prices on consumers will push OPEC+ to deviate from its plan and fill more tankers.
Just last week, OPEC’s monthly market report said global demand for oil this year will come in 160,000 barrels a day less than earlier forecasts. It’s not enough to cause a supply reaction, but a reminder that price matters.
OPEC+ nations are scheduled to meet again Dec. 2.
Meanwhile, U.S. shale producers could help boost supply.
Output from North Dakota’s Bakken shale basin is still down 400,000 barrels per day from its pre-pandemic peak of 1.46 million barrels per day, but it’s up almost 250,000 barrels per day from its May 2020 pandemic low.
Rystad Energy, an Oslo-based research and consulting business, said last week that strong prices are driving U.S. oil production to its highest level since March 2020, the start of the pandemic-induced demand collapse.
In the Permian Basin of Texas and New Mexico, Rystad expects production to average just more than 5 million barrels per day this month, the most in data going back to 2015. Overall, U.S. oil production is still below its 2019 peak, but there are signs that some companies are spending money again.
ExxonMobil and Chevron last month disclosed plans to expand drilling in the Permian. Company executives reported in earnings calls that they could each add two drilling rigs to their West Texas operations and boost production.
Exxon’s third-quarter Permian output rose about 30% above the prior period, CEO Darren Wood said on the call.
Chevron’s Permian production could rise to 1 million barrels per day from its current level of 600,000 barrels per day, the company said.
Though not all that oil will stay in the country. The U.S. exported about 3 million barrels of crude oil a day the first week of November, according to federal data. That’s almost one-quarter of all U.S. crude production.
In addition, 2 million barrels per day of gasoline and fuel oil left the country the first week of November, while U.S. motorists are paying the highest prices at the pump since 2014.
Most of the gasoline is going to Latin America, with Mexico and Brazil being the big buyers.
Markets are complicated. It shows up at the pump.
Larry Persily can be reached at [email protected].