OPEC-ministers

Capacity crunch: OPEC+ squeezes additional 100 kbd output

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The world’s major oil producers hosted in the Organization of Petroleum Countries (OPEC) and its nonmember coalition countries will increase their controlled oil output by only 100,000 barrels per day under the  its scheduled supply restoration.

OPEC and its allies, also called OPEC+, has been under pressure by European and American countries to increase output to address supply concerns and tame prices following sanctions against Russia by members of the North Atlantic Treaty Organization (NATO).

With worsening diplomatic and trade relations between Russia and NATO countries over the Ukrainian war, the United States is straining to bridge energy supply gaps in Europe. The governments of NATO nations also call on allies in the comity of producers to also assist in pushing more supplies to the market.

OPEC comprises mainly the former colonies of European nations while producers in the Middle East are diplomatic and military allies of the United States and NATO. And both the United States and European countries have appealed to friendly countries for increased oil and gas supplies. But Russia is a key member of the OPEC+ alliance, a situation that makes management of output quotas delicate and complex for the group.

In its latest output quota increase, OPEC+ which is also grappling with capacity issues arising from underinvestment caused by Western funding freeze against petroleum projects stated that it can only raise production by marginal volumes due to limited spare capacity.

French President, Emmanuel Macron, disclosed that he was told that two OPEC factors-Saudi Arabia and the UAE-had very limited ability to increase oil production.

The group which wiped some 10 million barrels per day of supply from the oil market in response the demand destruction of 2020 resolved in 2021 to gradually restore production to pre-pandemic levels with monthly increment in output quotas.

Monthly quota increase under the arrangement which began in the first month of the year ranged between 400,000 barrels per day and 650,000 barrels per day as global economies opened up to unleash a new wave of demand.

However, the period of production increases exposed the impact of global funding freeze on petroleum development during the pandemic era. Lack of investments meant that capacity replacement did not happen, leading to natural production decline in some poor producing nations.

The increase of 100,000 bpd will be one of the smallest since OPEC quotas were introduced in 1982, OPEC data shows.

Expectations of significant production increase were high after President Joe Biden made historic visit to the Middle East to rekindle America’s friendship with key oil producers, including Saudi Arabia.

Discussions during the visit had centered on military ties and energy supplies from the regions to industrialized nations of the West.

Thus, the 100,000 barrels per day production increase came very disappointing to many western analysts who described the volume as totally insignificant and unresponsive to appeals from the world’s strongest president who had approved sale of missile defence system sales to Riyadh and the United Arab Emirates.

But leaders of Saudi Arabia and Middle East producers had told President Biden that decisions on oil supply to the market were the function of OPEC+ were Russia is also a key decision leader.

Sources within OPEC+ confided in agency sources that the quota decision was intended to placate the United States and also avoid upsetting Russia.”

However, capacity remains the major determinant in responding to market demand. And only Saudi Arabia and the UAE are believed to have some spare capacity.

But by June, OPEC+ production was almost 3 million barrels day below its quotas as sanctions on some members and low investment by others crippled its ability to boost output.

OPEC+ said a chronic lack of investment in the oil sector will impact adequate supply to meet growing demand beyond 2023. Combined with disruption linked to Russia’s invasion of Ukraine in February, the lack of spare supply has driven up energy markets and spurred inflation.

Saudi Arabia and the UAE which are among the biggest producers in the region had announced to Biden that their redundant capacity has been stretched thin.   

Other OPEC producers including Nigeria have been unable to meet up their quotas due to declining available capacity. Most members of the group, including Iran, Iraq, Libya, Venezuela and Angola also struggle with inhibitions ranging from trade sanctions, internal instability, capacity losses and rising internal demand.

The situation in OPEC+ is worsened by anti-fossil policies foisted on the world by mainly European countries, and the subsequent closure of financing windows against the industry by multilateral lenders. Thus capacity drop followed years of under-investment in new capacity.

OPEC+ which will meet again on Sept. 5 said in a statement that limited spare capacity requires it to be used with great caution in response to severe supply disruptions. By then, OPEC+ would have wound down all of the record production cuts it implemented in 2020 in response to the impact of the pandemic.

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