Why OPEC can’t afford to reverse oil production cuts

OPEC is unlikely to reverse any of the production cuts it approved last year as rising production from non-cartel countries is rising, putting pressure on prices.

The observation, made by BP Chief Economist Spencer Dale, could inject some optimism into oil markets, where many seemed to expect that the very mention of a reversal possibility would make it a certainty.

OPEC earlier this year said that, given the right market conditions, it could start to reduce cuts – a total of 2.2 million barrels per day for the group and its OPEC+ partners – in the final quarter of this year. For some reason, the business media and traders took this to mean that the right market conditions would manifest, virtually guaranteeing the move. Ironically, this perception removed those right market conditions from the scenario as it put pressure on prices.

To date, OPEC cannot afford to put a single barrel back on the market, especially as it continues to deal with members who do not meet their quotas. A bigger threat, however, is rising production in the United States, Guyana and Brazil, according to BP’s Dale.

These three are regularly mentioned in discussions of global oil supply and the rivalry between OPEC and non-OPEC producers for control of the international market and prices. The U.S. is clearly the biggest driver, with production there adding about 1 million barrels a day last year but broadly rising more slowly this year.

The Energy Information Administration forecasts a modest increase in production to 300,000 bpd this year in its latest Short-term energy outlookwhere it also revised its forecast for oil demand growth for the year to 1.1 million bpd.

Oil demand is the crucial driver of production plans, of course, among both OPEC members and non-OPEC producers – and does not guarantee continued strong growth. Brazil, for example, has seen its oil production adds 13% last year at a record level of over 3.4 million barrels per day. This year, however, production growth has faltered, and in April, the total fell back to about 3.1 million barrels per day.

The country has plans to increase its crude oil output to 4.4 million barrels per day by 2034, which would be 47% higher than current production levels, but achieving these plans would depend on prices and demand .

Guyana – the other producer that BP’s Dale mentioned as a key player in oil these days – has been expanding its output fairly steadily over the past few years. However, it should be noted that it started from scratch in 2019, reaching a production rate of more than 600,000 bpd this year as Exxon ramped up the Stabroek block. EIA forecast in its latest STEO, Guyana’s production will further increase to over 800,000 bpd next year.

So, if the projected increase in crude oil production comes to fruition, it would certainly make it even more difficult for OPEC to reduce these production cuts, as the combined increase of the United States and Guyana would reach more than 1 million barrels per day, offsetting essentially about half. of OPEC cuts. OPEC is indeed in a difficult situation. But here’s the problem: the oil market appears to be in a deficit.

Global oil inventories are at a steady level the path of decline, and recent EIA forecast that supply will fall short of oil demand by about 750,000 bpd in the second half of the year, which was an upward revision from an earlier projection of 500,000 bpd. The oil market is tight and prices are still falling. OPEC won’t reverse cuts anytime soon.

By Irina Slav for Oilprice.com

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