Oil producers fail to keep up with demand, keeping prices high

Nearly two years ago, the world’s oil producers slammed on the brakes and drastically reduced production as the pandemic gripped the world’s economies. The sharp downturn was accompanied by an implied promise that if factories reopened and planes took to the skies again, the oil industry would also revive and gradually scale production to help economies return to prepandemic health.

It doesn’t exactly turn out that way. Oil producers are finding it harder than expected to ramp up production. Members of the OPEC Plus cartel, which agreed to cut production by about 10 million barrels per day in early 2020, are routinely falling far short of their rising monthly production targets.

“In many places, it’s not easy to cut output once output is reduced,” said Richard Bronze, chief of geopolitics at Energy Aspects, a London-based research firm.

Production in the United States, the world’s largest oil producer, also slowly recovered from the one million barrels per day drop in 2020, as companies and investors are wary of investing money over concerns about climate change and volatile prices. The Energy Information Administration predicts that U.S. crude oil production in 2022, while rising, will be on average half a million barrels per day below 2019 levels.

This global pattern of lagging production has helped oil prices rise to their highest level in seven years, fueling inflation that has become a political problem in the United States and elsewhere. Brent oil, the international standard, costs nearly $84 a barrel, while West Texas Intermediate, the US benchmark, sells for nearly $82.

A long period in which more oil has been used than pumped has drained tank farms to a low level. Investment in new drilling for new oil has also fallen to multi-year lows, although this year is expected to pick up. At the same time, demand is expected to grow strongly and reach pre-pandemic levels this year.

“The oil market appears to be heading for a period of little safety,” Martijn Rats, an analyst at Morgan Stanley, the investment bank, wrote in a recent note to clients.

The gap between the target announced by OPEC Plus, which accounts for nearly half of world oil production, and actual production appears to be growing. The International Energy Agency, a Paris-based forecasting group, estimated the deficit of the 19 OPEC Plus quota countries at 650,000 barrels per day for November. Energy Aspects forecasts that the deficit will hit just over a million barrels per day this month, or 1 percent of world supply, and is likely to widen later in the year.

That shortfall could be problematic, as policymakers and some analysts may overestimate how much more oil the group can add.

“OPEC Plus is seen as the primary source of additional supplies,” said Mr. Bronze.

Of course, higher prices are likely to encourage a significant increase in shale oil production in the United States. The tight market also gives Washington an incentive to lift sanctions on Iran’s oil sales by reaching an agreement on Tehran’s nuclear program.

Forecasters are divided on the oil outlook, with the International Energy Agency saying in its most recent monthly report in December that “much-needed relief for tight markets is on the way”. The Energy Information Administration has forecast that oil prices will fall later this year.

Yet underspending by countries like Nigeria and Angola has become the norm while their oil industries are struggling. Several factors are causing production to fall short in some countries, including political unrest, outdated regulatory regimes and pressure on international oil companies to rethink their investments to increase profits and reduce carbon emissions. That shift could leave developing countries dependent on oil revenues out in the cold.

“There are a lot of basins that just aren’t interesting anymore,” said Gerald Kepes, president of Competitive Energy Strategies, a consulting firm, referring to petroleum-bearing regions. In the eyes of international oil companies, even a country like Nigeria, Africa’s largest producer, is “not making it,” he added.

Oil industry giants have courted Nigeria for decades, investing billions of dollars, but production is on the wane. In November, the country was expected to pump about 1.6 million barrels per day, but missed that target by more than 300,000 barrels per day, according to the International Energy Agency.

Behind the shortage is a mishmash of problems. Nigeria’s industry is plagued by damage to infrastructure caused by oil thieves and others, problems the industry says have been exacerbated in recent months.

International companies, including Shell, which has long been a major investor in Nigeria, are gradually reducing their presence in swampy areas where their installations are vulnerable. They are being replaced by smaller companies with less capital to spend, analysts say.

Without investment in drilling and technology, even the best-off oil states will see their production dwindle. An example of this is troubled Venezuela, where amid industrial neglect, production has shrunk to relatively minuscule levels of less than a million barrels a day — less than a tenth of Saudi Arabia’s production — despite claims it is the largest reserves in the world, about 300 billion barrels.

Kuwait, a prosperous oil state in the Persian Gulf, has seen its production capacity decline by about 18 percent in three years. Kamel al-Harami, a Kuwaiti analyst, said the domestic industry “does not have the experience and expertise to deal with old and aging oil fields”, but public opinion is resisting bringing in international companies.

Even Russia, which is roughly tied to Saudi Arabia as the lead producer in OPEC Plus, is close to the short-term limit of what it can produce, analysts say. Saudi Arabia, on the other hand, produces about 10 percent of the world’s oil and could produce more.

“Most OPEC producers face capacity constraints,” said Bill Farren-Price, the intelligence director at Enverus, an energy market research firm. “But Saudi Arabia is a different story – its appetite for active oil market management is unabated,” he added.

Every month since the pandemic hit, OPEC Plus members have gathered to set output quotas. Under a schedule agreed in July, the group plans to increase total production by 400,000 barrels per day each month, even if they fall short of targets.

Buoyed by gasoline prices that have surged about 40 percent in the past year, the White House has leaned on the Saudis and their allies to accelerate the throttle, but OPEC officials have so far been unwilling to cut the quotas on those they are unable to hit targets and reassign them to other countries.

“We have to keep what is assigned to them,” Prince Abdulaziz bin Salman, the Saudi oil minister, told reporters late last year. The alternative, he added, would be a monthly debate about “who gets what.”

Analysts say Saudi officials do not want to unilaterally increase production and risk breaking the agreement with other producers that gives them so much control. In addition, the lagging countries serve as a covert way to reduce the cartel’s production, allowing the Saudis to take advantage of high prices while increasing their own production.

And time may not be on the side of the Biden administration and others pushing for more oil in the markets. As producers reach the limits of what they can make in the coming months, “demanding OPEC to add more will be less and less impactful,” said Mr. Bronze.

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