[ad_1]
Earlier this month, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC +, announced their decision to increase production to 400,000 barrels per day in January.
The group’s decision came at a time of greater concern for producers and consumers and highlighted the focus on new realities and changing dynamics in the global hydrocarbon market.
On December 2, OPEC + countries met in a virtual meeting to decide between two scenarios: to continue to increase production volume or to temporarily freeze.
On the surface, there were many strong motivations for choosing this last option: the oversupply expected in the first half of 2022; the fear that a new strain of coronavirus would further reduce the rate of oil consumption; and the decision by the United States and other countries, including India, China, Japan, and South Korea, to bring large volumes of oil from their strategic reserves to market to reduce prices. However, despite strong arguments in favor of the freeze, the poster decided to stick to its current exit plan.
There were several reasons behind the poster’s decision:
First, the economic development strategies of the major OPEC + actors (and especially the Gulf monarchies) make it desirable to freeze (or reduce) production quotas. In the long run, global oil demand is expected to decline, severely reducing the income of oil exporters and turning some of their oil fields into hidden assets. To avoid this, producers are working to diversify their economies and make renewable energy a viable part of their economic structures. Currently, the only viable source of funding for OPEC + countries for their diversification efforts is oil resources, which are under increasing pressure to assess the expected fall in prices and falling price demand to convert these resources into cash. This means that for OPEC + countries, self-imposed production limits have only been a temporary measure to stabilize the oil market and delay the fall in prices; in the long run, it will always be more beneficial for oil producers to increase their production volume. .
Second, the volume of oversupply in the market forecast for 2022 is unclear. In fact, there is no consensus among experts on the longer-term expectations of the oil market. While many expect the market to be well-supplied, encouraging greater competition between actors, others warn that not investing in the oil sector could result in producers not significantly meeting demand. This means that OPEC + members are going blindly through the mining area, trying to avoid the wrong choices that could lead to significant loss of income and stopping their efforts to adapt their economies to the new realities following hydrocarbons. They are therefore reluctant to reduce production volumes, but are not ready to increase beyond the already established quotas so as not to lower the price of oil, especially since any period of shortage can easily be followed by a period of overproduction.
Third, OPEC + members know that even if they are committed to keeping up with the current production plan, they may not be able to meet their production quotas. By November 2021, the difference between nominal and actual production in OPEC countries was -390,000 barrels per day. In addition, under the pretext of respecting each other’s production quotas and interests, other Member States refuse to compensate for volumes that are underproduced. This has its own logic: underproduction supports higher prices, which is especially important on the eve of the expected market oversupply in 2022. It also allows producers to limit the production volumes of their cartel without overwhelming consumers.
Rising power consumption
Another major reason behind OPEC + ‘s decision not to freeze production quotas was the fear of angering major oil importer countries. Today, the impact of oil consumers on the market is gradually increasing. With the advancement of the energy transition and the frequent return of market supply, there is more and more demand, not supply, that determines the dynamics of oil and gas prices.
There is already expected to be too much oil on the market by 2022, and by some estimates, by 2030, there may be 10 million barrels left over in the market. As a result, attempts by producers to put pressure on price changes by regulating production volumes are increasingly being met with harsh reactions from consumers. But at the same time, expectations of oversupply and high levels of uncertainty in the market are giving producers some leverage.
This shift in power dynamics between producers and consumers has already had a significant impact. On November 23, US President Joe Biden promised to extract 50 million barrels of oil from the US Strategic Reserve to help lower energy costs. This move was important for a number of reasons.
First, with this move, the U.S. has clearly reclassified itself not as a producer, but as an oil consumer, and has made it clear that it is not satisfied with high prices and limited supply. Of course, the U.S. government has long had an impact on determining what happens in the oil market. Since the mid-2010s (if not earlier), however, it has largely been perceived as a producer, not a consumer. In fact, when Biden’s predecessor, former President Donald Trump, expressed dissatisfaction with OPEC + ‘s moves to tighten production quotas or criticized the cartel’ s brief price war in 2020, OPEC + countries continued to perceive the US as a major oil producer.
The U.S. began to act as a consumer rather than a producer for the first time earlier in the year, despite rising prices, when domestic shale producers abandoned the policy of pumping as much oil as possible in favor of a more limited approach. production growth. The current administration tried as much as possible to encourage greater growth in shale oil production, but did not change the opinion of the producers. Deciding to release important reserves to lower prices, the Biden administration has clearly shown that it is accepting the new position of the domestic industry and is now ready to act as an advocate for the interests of consumers.
What made Biden’s decision to release the reserves even more significant was the support of many other powers in the world. Despite political tensions, the US has been able to unite with a group of influential oil consumers who are struggling on their own against OPEC + production limits and the consequent rise in prices. China, for example, sold part of its restorations in the fall of this year, and India, Japan and South Korea also expressed similar intentions recently. None of these Asian countries used oil reserves in the past for a global and coordinated price war.
It’s not war, yet
Of course, Biden’s decision on November 23 was not a declaration of war, but a demonstration of the new ability of consumers to influence the market. In terms of its scale, the total volume of oil extracted from reserves does not exceed the global daily demand (however, to balance this, OPEC + would have to stop increasing its production quota for a while). In addition, the release of additional barrels will be staggered, and a significant portion of them will have to be returned to the U.S. reservation by sellers. There are still some questions about the US commitment of Asian partners to release their reserves (so far only Japan has confirmed that it will make the move).
However, for the members of OPEC, and especially for the Gulf monarchies, the warning given by Asian consumers was significant. Given Asia’s key role in the future of the oil market, a positive long-term relationship with the Asian power will be crucial for Saudi Arabia, the United Arab Emirates, Iraq, Kuwait and potentially Iran’s ability to maintain. their positions in the oil market during this volatile period of energy transition.
As a result, on December 2, OPEC + did not dare to freeze its production volume. Instead, he chose to succumb to the pressure of consumers, albeit prudently. This means that we are witnessing a new reality in the oil market, where producers are forced to take into account the wishes and interests of consumers.
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial attitude of Al Jazeera.
[ad_2]
Source link
