With other leaders also calling for ramped up production, as many countries face a cost-of-living crisis, the agreement was seen as a blow, with the production uplift far less than hoped for and slower than the pace of increased output of recent months.
Despite the disappointment, the additional 100,000 barrels a day from Sept, combined with an unexpected increase in US commercial crude oil stocks of 4.5 million barrels, had an immediate impact on the oil price with crude oil trading lower the morning after the OPEC+ agreement was announced.
Falling below expectations
With crude having traded consistently above $100 since February, driving up the cost of living, Biden had personally travelled to Saudi Arabia in a bid to persuade the country to increase output in order to stem the soaring price rises.
Regarding the meetings with Saudi Crown Prince Mohammed Bin Salman to have been positive and, with Saudi Arabia the biggest single producer in OPEC+, President Biden left saying he ‘expected the supply to increase’.
Saudi representatives made it clear, however, that any decisions on output would be made in consultation with OPEC+. Having previously added 600,000 bpd to the market in July and August the decision following the latest meeting to increase output by just 100,000 bpd was described by some as ‘an insult’ and ‘so little to be almost meaningless’.
Drop in demand
Given the minimal nature of the raised production, the immediate reaction of the markets was due more to the additional impact of the increased US stockholding. The petroleum status report of the US EIA (Energy Information Administration) released at the start of August, showed an increase in the US commercial crude oil inventories (excluding those in the strategic petroleum reserve) by 4.5 million barrels from the previous week.
At the same time the report indicated a decline in the supply of products with the previous four-week’s supplies averaging 19.9 million barrels a day, down by 3 per cent from the same period last year. The US crude oil refinery inputs averaged 15.9 million barrels a day during the week ending July 29, which was 174,000 barrels a day less than the previous week’s average. Refineries operated at 91 per cent of their operable capacity.
It’s not that easy
With market analysts seeing the output uplift as a setback to the attempts to convince Arab leaders to produce more crude oil, OPEC+ was quick to defend its stance, suggesting that ‘turning the taps on full’ may not be that easy with several members having struggled to meet their production targets for some time.
The OPEC+ meeting noted that the severely limited availability of excess capacity necessitates utilising it with great caution in response to severe supply disruptions. It also noted that the chronic underinvestment in the oil sector has reduced excess capacities along the value chain.
The meeting highlighted that insufficient investment into the upstream sector will impact the timely availability of adequate supplies to meet the growing demand beyond 2023 from non-participating non-OPEC oil-producing countries, some OPEC member countries and participating non-OPEC oil-producing countries.
Saudi Arabia is the key player being one of only two major players with any spare capacity – the other being the UAE – and experts suggest that Saudi production of 11 million bpd is already high and leaves little opportunity for more significant increases.
OPEC+ is also keen to maintain good relations with Russia since it is one of the biggest partners in the alliance and, before the invasion of Ukraine, was the world’s third largest oil producer accounting for 8-10% of global supply.
Russia has no desire to see the oil price drop as it diverts its diverts its shipments to China and India and needs the income to offset the impact of Western sanctions and continue funding the war. OPEC’s desire to work with Russia is a large factor in the decision to maintain the stance agreed last year of increasing supplies very gradually from September despite calls from the UK and US to ramp up output.
The rise in US stock holdings is indicative of another consideration that may be making the cartel unwilling to add another dramatic production increase at this time. The energy demand outlook over the coming months is far from certain, with recessions predicted in many countries in the West, rising interest rates and the ongoing war in Ukraine all expected to impact heavily in reducing demand.
With so many unknowns in the oil markets producers will want to use their spare capacity wisely adding to OPEC’s cautious approach.
As Karen Young, senior fellow at Middle East Institute in Washington DC commented: “They don’t want to be in a situation where they utilise their limited spare capacity to ramp up production and then suddenly, if demand shoots up or goes down in the future they are left with no room to make adjustment.”
The future outlook
The current oil price is finally back below $100/bbl for the first time since February, but it is not anticipated to remain there for long.
Oil demand estimates from the IEA and the EIA anticipate continued strong growth despite the poor economic outlook, inflation and the continued war. As China makes progress in controlling the coronavirus, demand is expected to increase resulting in rising global oil demand through 2023.
This will leave producers once again needing to increase output to balance supply and demand. Given the lack of global investment in downstream, refining and production capacity coupled with the end of the US release of 1 million bpd from its strategic reserve coming to an end in October we could, once again, see supplies becoming tight and prices rising.