This week, OPEC released its monthly oil market report. It came just hours after the IEA released its own monthly oil market forecast. Contrary to the IEA, the oil company forecast that oil demand would grow more slowly this year than previously expected. OPEC also forecast an oil market surplus, sparking speculation that it could be preparing for production cuts.
According to OPEC’s latest monthly oil market report, oil demand will reach a healthy 3.1 million barrels per day this year, although the second-half forecast is revised downwards on “expectations of a resurgence of COVID-19 restrictions and ongoing geopolitical uncertainties.” .” These geopolitical uncertainties are a benevolent euphemism for the war in Ukraine.
More interestingly, however, OPEC also calculated the difference between global oil demand for the current quarter and non-OPEC production at 28.27 million bpd, which OPEC would need to produce itself to keep the market in balance.
This is not an overt declaration of production cuts. It’s a simple ab calculation at the bottom of a table that shows world oil demand and supply. But it does suggest that a reversal in OPEC’s production policy could be on the way, as ZeroHedge hinted in an article published Thursday.
Most of OPEC is already – and still is – below its production targets. The cartel and its Russian-led partners pledged to increase production by more than 600,000 bpd in July and August, up from about 420,000 bpd originally agreed. However, they missed that target in July and will likely miss it again this month.
Additionally, at its last meeting earlier this month, OPEC+ agreed to increase overall production by a modest 100,000 barrels per day. Traders were surprised by the addition, and some saw it as a direct slap to Biden after the US president traveled to the Middle East to personally plead with Riyadh for more oil.
Speaking of Riyadh, the crown prince, who effectively rules the kingdom, has made it clear that he will not use the country’s spare oil production capacity unless the global oil supply situation becomes critical.
He used terms such as “severely limited availability” of spare production capacity, although anonymous sources spoken to by Portal said both Saudi Arabia and the United Arab Emirates could produce “significantly more” oil should the need arise.
The question now is whether OPEC sees this as a necessity.
This latest downward revision in demand was the third the cartel has made since April. The IEA now appears to have realized that the impact of Western sanctions on Russian oil production and exports has been far less severe than feared. And that sets the stage for an oil market that is better supplied than many would have expected just a few months ago.
Of course, it would be negligent to ignore the destruction of demand due to high prices as a factor in the overall decline in oil demand. But the destruction of demand, as it is, is being offset by a surge in gas-to-oil switching, particularly in Europe as utilities and governments grapple with record-breaking gas prices.
This week, a tanker carrying US Mars crude arrived in Germany, marking the first shipment of such crude to that country. The reason: the impending Russian oil embargo and the urgent need to find alternatives to Russian crude oil, especially since the tight gas supply situation is getting worse by the day.
See also: The burgeoning energy partnership between Azerbaijan and the EU
The gas-to-oil shift, which may well accelerate as the heating season approaches, could become a major source of oil demand in the near term. There are other reasons for the upside as well: Portal reported earlier this week that US refiners and pipeline operators expect strong demand for their product in the second half of the year, despite high prices.
Should demand prove healthy and strong, OPEC would not need to take any action to support prices. Brent crude is just a dollar under $100 a barrel at the time of writing, and West Texas Intermediate is above $93 a barrel.
That kind of Brent price should be fine for OPEC. However, when it falls, things can change very quickly.
The likelihood of that happening seems slim, at least according to Goldman Sachs’ Damien Courvalin. In a new forecast, Courvalin said analysts at the bank expected oil prices to rise back to $130 a barrel by the end of the year.
“We are still in deficit. Although growth is slowing, prices still have work to do and that’s higher from here,” he told Bloomberg.
It’s always remarkable when OPEC sees a market surplus where others see a deficit. Usually this means that the cartel may be preparing for lower production in anticipation of price levels that are inconsistent with its expectations.
Of course, OPEC is aware of the fine line between underdoing and overdoing prices and killing demand, which is why the cartel is unlikely to be ready to start cutting production any time soon. For now, suffice it to say that OPEC has made it clear that spare capacity is limited and most members cannot meet their quota. After all, there’s only so much a cartel can do.
By Irina Slav of Oilprice.com
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