April 11, 2022

WWW.ENERGYINTEL.COM

Opec-Plus: Iraqi, Russian Troubles Exacerbate Capacity Question

  • The 19 members of Opec-plus with quotas only managed to lift crude oil output in March by 86,000 barrels per day, or 314,000 b/d less than the scheduled monthly increase.
  • For the month, the alliance came up 1.5 million b/d short of its required production level of 39.5 million b/d.
  • Spare capacity within the alliance is assessed at 2.3 million b/d now that Russian oil has been marginalized and Iraq has reached its limit.

The Opec-plus group is increasingly straining to produce crude oil, particularly among its non-Opec members. Russian oil is now confronted with moral hazard risks, and Kazakhstan’s main artery to global markets, the Caspian Pipeline (CPC), has suffered a large outage. Iraq, meanwhile, has reached its capacity limit due to technical constraints, a senior official has told Energy Intelligence.

Even though five countries will see an increase in the base level in May, only three of them — Saudi Arabia, United Arab Emirates, Kuwait — will be able to actually lift production. This means the gap between the alliance’s targeted production and actual output will only grow throughout the year.

However, renewed Covid-19 lockdowns in China, strategic oil releases by developed nations and a reduction in consumption due to high prices are mitigating any effects of Opec-plus’ dwindling production capacity.

Created with Highcharts 9.0.0($/bbl)OPEC BASKET — THE WAR PREMIUMApr '21May '21Jun '21Jul '21Aug '21Sep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '22$60$70$80$90$100$110$120NOTE: As of first day of month. Source: Opec

Lackluster Non-Opec

In March, the 19 members of Opec-plus with a quota — Iran, Libya, Venezuela and Mexico are exempt — cranked out 37.98 million b/d of crude oil, a mere 86,000 b/d more than in February, according to Energy Intelligence’s assessment. This was the worst month-on-month performance since August 2021, when Kazakhstan carried out major field work at its two largest fields, Tengiz and Kashagan.

The nine non-Opec members with a quota are the main reason for the lackluster month. Output by Russia, whose oil has become toxic for many traditional importing countries and is facing an outright US ban, fell by almost 50,000 b/d to 10.01 million b/d, while Kazakh output declined by an equal amount after storms knocked out two single-point mooring terminals in the Black Sea. Malaysian production dropped by 38,000 b/d on the month to 403,000 b/d.

In sum, the nine non-Opec producers posted a 140,000 b/d decline in March to 13.93 million b/d.

By contrast, the 10 Opec members managed to boost output for the month by 225,000 b/d to 24.05 million b/d. Alliance leader Saudi Arabia lifted production by 110,000 b/d to 10.34 million b/d, while Nigeria and Angola, which have grappled with natural declines and technical failures in recent months, together managed to increase output by nearly 110,000 b/d.

Shortfall Increases

Total output by the Opec-plus 19 last month amounted to 37.98 million b/d. This is 1.56 million b/d short of the target of 39.54 million b/d for March. In other words, the alliance is four months behind schedule: what the 19 producers managed in March is what they should have achieved in November.

As a result of the underproduction, the compliance rate for the month was 161%, a level at which the whole notion of compliance becomes moot.

Created with Highcharts 9.0.0OPEC-PLUS COMPLIANCE RATE BECOMES MOOT POINTOpecNon-OpecOpec-plusJul '20Oct '20Jan '21Apr '21Jul '21Oct '21Jan '2280%100%120%140%160%180%NOTE: Compliance rate based on updated monthly assessments; Opec rate does not include Libya, Iran, Venezuela; non-Opec does not include Mexico. Source: Energy Intelligence

The situation is expected to get worse before it improves, particularly because of Russia. The alliance’s second-largest producer should see a decline of some 800,000 b/d in April to 9.2 million b/d, our assessment shows, as more traders refuse to purchase Urals and domestic refinery runs are falling. Forecasting this fall is tricky, but Russian crude oil output could hit a nadir of 8.5 million this summer.

Opec-plus 19 production is projected to fall to 36.6 million b/d by July. At that point, the rift between targeted and actual production would grow to 4.5 million b/d, which could put significant upward pressure on global prices.

Created with Highcharts 9.0.0('000 bbl)ALLIANCE PRODUCTION SHORTFALL STEADILY CLIMBSSep '21Oct '21Nov '21Dec '21Jan '22Feb '22Mar '2202505007501000125015001750Source: Energy Intelligence

Capacity Constraints

A senior Iraqi official has said that the country, which produced 4.26 million b/d in March, has effectively reached its output capacity. The limit for Basrah exports is now considered 3.3 million b/d, a level that might not be sustained given various technical issues that continually arise, the official explained. In March, Basrah exports amounted to 3.24 million b/d.

Due to geopolitical constraints, Russia will not be able to reach its assessed capacity of 10.2 million b/d; in fact, the country’s capacity might fall if the war drags on and producers are forced to shut in output due to a dearth of storage capacity. Even at a $40 discount, Russian producers can still make money on Urals exports, but reduced netbacks will compel them to pick and choose will wells to operate.

Kazakhstan now has some 190,000 b/d in additional capacity, but no doubt the country will try to bring all this back on line in June after CPC operations are repaired. Beyond that, there are some small pockets of spare capacity in places like Oman and Algeria.

The bulk of spare capacity lies with the Opec trio of Saudi Arabia, UAE and Kuwait. Together they have 2.1 million b/d, or 90% of all alliance spare capacity. Kuwait is expected to drop off the list in upcoming months as output plateaus at 2.7 million b/d. At that juncture, all spare capacity sits with only two producers.

Compliance With Opec-Plus Production Cuts
OpecBase ProductionMarch CeilingMarch ProductionOver/Under TargetCompliance With Cuts
Saudi Arabia11,00010,33110,335499%
Iraq4,6534,3704,257-113140%
UAE3,1682,9762,970-6103%
Kuwait2,8092,6392,6390100%
Nigeria1,8291,7181,202-516565%
Angola1,5281,4351,150-285406%
Algeria1,0579921,000888%
Congo (Br.)325306224-82532%
Gabon18717518914NA
Eq. Guinea12712085-35605%
Opec 1026,68325,06224,051-1,011162%
Iran3,296NA2,505NANA
Venezuela1,171NA685NANA
Libya1,114NA1,121NANA
Opec 1332,26425,06228,362-1,011162%
Non-OpecBase ProductionMarch CeilingMarch ProductionOver/Under TargetCompliance With Cuts
Russia11,00010,33110,015-316147%
Mexico*1,7531,7531,740-13NA
Kazakhstan1,7091,6051,613892%
Oman8838298582946%
Azerbaijan718675591-84295%
Malaysia595559403-156533%
Bahrain205193198558%
South Sudan13012288-34525%
Brunei1029681-15355%
Sudan75718110NA
Non-Opec 915,41714,48113,928-553159%
Combined 19*42,10039,54337,978-1,565161%
Opec-Plus 2349,434NA44,029NANA

Gary Peach, New York