Oil prices stay high despite demand disruptions

The OPEC+ alliance of 23 oil-producing nations, led by Saudi Arabia and Russia, is continuing along the path of boosting its oil production target by 400,000 barrels a day every month since last summer.

That path is supposed to lead to full restoration of pre-pandemic production numbers before the end of this year.

OPEC+ members met Jan. 5 and reaffirmed another step-up in output for February.

Meanwhile, the rapid and stressful spread of the omicron variant of COVID-19 has flustered the global economy with concerns about factory cutbacks, travel curtailment and a pullback in fuel demand growth.

The possibility of less demand normally would prompt a retreat in prices, but despite those worries, and some reports of weakened demand in China, global oil prices continue to stay high. Markets opened Jan. 10 at around $81 per barrel for benchmark Brent, a few dollars under the 2021 high of $85 but staying well above the $65 price of just five months ago.

Global market analyst IHS Markit this month lowered its projection for China’s total oil demand in the first quarter of 2022 by 420,000 barrels a day. That’s about a 3% slide from China’s daily oil demand in November, though IHS acknowledges it’s probably only temporary, due to omicron factors.

Still, it’s a demand arrow pointed down, not up. Yet prices aren’t following suit.

As often in the case with OPEC and its alliance members, numbers don’t lie, but the production numbers don’t always add up.

Several + members are increasingly finding it hard to meet their production targets. So, while the headlines say OPEC+ continues to raise output, the reality is not so much.

A Reuters survey reported on Jan. 7 that the increase in output announced for December had underachieved the OPEC+ target by more than 250,000 barrels a day.

While top producers Saudi Arabia, Iraq and several other nations have upped their output, and can continue to do so, production fell or stayed flat in Congo, Equatorial Guinea, Nigeria, Libya and Iran, the survey found. A shortage of capacity due to underinvestment, a lack of maintenance, civil unrest and unplanned outages were cited as the culprits.

The International Energy Agency in December estimated that OPEC+ came up short of its November production target by 650,000 barrels a day, a shortfall of more than 2%. The IEA report cited Nigeria and Angola as among the countries struggling to boost production.

Nigeria, Africa’s largest producer, pumped 360,000 barrels a day below its quota in November. “A poor regulatory framework, sabotage and vandalization of oil facilities” are deterring needed spending in Nigeria, the IEA said in its report.

Even Russia is having problems, not that Prime Minister Vladimir Putin would ever admit to it. “Russia is temporarily near its limits,” said Bhushan Bahree, an executive director at IHS Markit. Getting past that wall will require changes to tax policies and development of new fields, analysts said.

Russian companies pumped an average of 10.903 million barrels per day of crude oil and condensate in December, according to preliminary data from the Energy Ministry, as reported by Bloomberg. That is flat to November.

For much of 2021, Russia ramped up production relatively easily by restoring operations at wells that were shut-in or idled in spring 2020 when the pandemic destroyed global demand and oil-producing nations cut back production by millions of barrels per day, including the U.S.

That was then, but now any further substantial growth will require drilling new wells, officials at Russian producers Lukoil and Gazprom Neft, the oil arm of gas giant Gazprom, said late last year.

Lukoil, Russia’s second-largest oil producer, has said its spare capacity will be used up by April if OPEC+ keeps adding 400,000 barrels a day each month to its production target.

Russia reached a post-Soviet production record in 2019 of 11.25 million barrels per day of crude and condensate. Russian producers were back to averaging 10.52 million a day in 2021, according to calculations by Reuters, but the next several hundred thousand barrels per day will be harder to get out of the ground.

Deputy Prime Minister Alexander Novak has said that country’s oil output is expected to rise close to its record in 2022, though analysts question the likelihood.

That questioning of Russia’s capacity, along with production shortfalls among other members, in part explains why oil prices remain high, even as OPEC+ says it will continue boosting output.

December was the seventh straight month that OPEC+ had failed to meet its production targets, Julian Lee, an oil strategist at Bloomberg, reported last week.

“That gap’s not going to close any time soon,” Lee wrote. “The deficit won’t ever be recouped unless those in the group with spare capacity are allowed to make up the production shortfalls of those without. This seems unlikely.”

OPEC+ members have historically been reluctant to allow the more well-endowed among their group to take away market share from under-producers. They’d rather see the world short of oil and subsequent higher prices.

“The deficit is only going to get bigger as the target continues to rise by 400,000 barrels a day each month,” Lee said.

A longer-term problem is the lack of investment.

New oil and gas discoveries around the world last year totaled 4.9 billion barrels equivalent, the lowest since 1946, Rystad Energy, a respected and worldwide energy research firm based in Norway, said in a report issued last week. The 2020 total was 12.5 billion barrels of oil equivalent, Rystad said.

“A reduction in cumulative volume highlights the absence of large individual finds,” the report said.

The monthly average of new discoveries in 2021 was a paltry 424 million barrels of oil equivalent, Rystad reported. That’s equal to just over four days of global oil consumption.

After spending almost $462 billion on new projects in 2019, the industry cut its development budget to $335 billion in 2020, with only a small increase for 2021, according to an analysis by Canadian bank RBC Capital Markets. That lack of spending is taking a toll on new discoveries.

That is making the market nervous about supply meeting future demand.

Larry Persily can be reached at [email protected].

Updated: 
01/12/2022 - 11:38am