Market Forces: The Next Frontier

Copyright © 2023 Energy Intelligence Group All rights reserved. Unauthorized access or electronic forwarding, even for internal use, is prohibited.

Even though Opec-plus is still in the thick of its crude production cuts, attention is moving to the next stage in the rebalancing process: working down spare capacity. Energy Intelligence reckons the world still has 10 million barrels per day of spare capacity, of which 8 million b/d can come to the market, with the remaining 2 million b/d offering a cushion to deal with calamities. When the future of oil supply and demand is discussed, attention invariably moves to the possibility of production shortages due to a lack of investment or to peak demand as the world turns to greener energy. The ample girth of spare capacity gives the world time to adjust to new realities. How long it will take to work down the unused installed production capacity is unclear since both demand and supply are much in flux, but the current cushion could take balances well into 2023 (EC Feb.26'21). With Brent hovering around $66, Opec-plus countries confirmed their short-term production policies on Tuesday (related). That means that by July, an additional 2.14 million b/d of Opec-plus oil is coming to market, which brings the Opec-plus crude production target to 38.05 million b/d for the rest of the year (EC Apr.9'21). This action also whittles down spare capacity to just less than 8 million b/d. Energy Intelligence balances signal that Opec-plus has little room to further increase production in 2021 as it still needs to work down surplus fuel inventories built up during the pandemic, mostly refined products stored in Asia. The next four months should drain much of it with high oil demand during the Northern Hemisphere summer. But global oil consumption this year is expected to peak in August, and then stay largely flat at around 99 million b/d for the rest of 2021. Supply would have to follow. Opec Takes Control Opec members with a quota hold back 7.1 million b/d in production capacity, while Iran, which has no quota, is forced to keep 1.5 million b/d of potential production off the market due to US sanctions. Russia, the leader of the non-Opec producers in the Opec-plus alliance, has an estimated 1.1 million b/d of spare capacity, while non-Opec member Kazakhstan holds 100,000 b/d. Some 300,000 b/d is shared between other non-Opec members Oman, Malaysia, Azerbaijan and Bahrain. As the world moves to equilibrium and Opec-plus relaxes its cuts, more spare crude production can be brought back. For every two barrels that non-Opec turns on, Opec can turn on three. Non-Opec moves to full capacity when it brings back 1.4 million b/d. As its share of that relaxation, Opec can bring back 2.1 million b/d. Once that is done, the 10 Opec members with a quota still hold 5 million b/d of spare capacity, with another 1.5 million b/d in Iran. With non-Opec maxed out, that would hand Opec and its leader Saudi Arabia control over the oil market. Saudi spare capacity is over 3 million b/d alone. To further cement its dominant position and gain market share over time, state Saudi Aramco is working on adding another 1.14 million b/d of production capacity, to be on line probably by 2024, from the Zuluf, Marjan and Berri fields. They would boost production capacity to 13 million b/d. Likewise, Abu Dhabi National Oil Co. (Adnoc) is raising crude production capacity by almost 1 million b/d to 5 million b/d by 2030. They want to bring their expensive spare capacity on line and monetize their huge reserves. Limited Demand Upside? When countries can fully open the taps is unclear. In 2022, according to preliminary oil balances, another 2 million b/d of Opec-plus crude oil can come to market. That oil would meet demand growth, while non-Opec is expected to add around 700,000 b/d in liquids. At the end of 2022, the world would be left with 6 million b/d of spare capacity. That could dwindle fast. In many forecasts, Covid-19 has brought forward the year that the world would see peak oil demand. The general consensus is that demand would still see a limited growth for the next couple years, jump a little over 2019 levels, but would struggle to grow much beyond that. Energy Intelligence sees average oil demand in 2019 at 100.7 million b/d, and average demand in 2021 around 3 million b/d below that, the bulk of it jet fuel as the pandemic limits international travel. Once countries successfully overcome Covid-19, especially in places like India and Brazil, the non-OECD world could see previous oil demand growth patterns resume. That growth could more than offset the expected decline in OECD demand. John van Schaik, New York Opec-Plus: Key Spare

Oil Demand, Oil Supply, Crude Oil
Wanda Ad #2 (article footer)
President Xi Jinping has advanced the development of non-Western groups like Brics. But China's economic problems and pushback from the US are complicating his plans.
Thu, Sep 14, 2023
Powell says the higher oil price is a “significant thing” but that the central bank tends to “look through” energy moves if they reflect short-term volatility.
Wed, Sep 20, 2023
The EU's anti-subsidy probe against China’s electric vehicle (EV) exports could undermine road transport decarbonization, possibly delaying the peaking of gasoline demand.
Wed, Sep 20, 2023