Yves here. The headline is overheated, but it is highlighting that oil markets, and hence the global economy, could be in for a nasty surprise. Recall how Joe Biden has been repeatedly trying to get Saudi prince Mohammed bin Salman to pump more oil. Scott Ritter gives an almost comic recap of why that effort will go nowhere starting at 1:29:14:
Nevertheless, there’s a second issue at work which this post highlights. Saudi Arabia and the UAE have long been viewed as swing oil producers, able to pump more when needed. But world markets may lose output due to upheaval in Libya and the West may lose additional Russian oil if they try to proceed with their harebrained oil price cap scheme. Russia would be completely within its rights to treat any effort to enforce this demand via cutting payments as a breach of contract and stop the related shipments.
But the Saudis and UAE may be close to their production limits, which could lead to sharp price rises if other major suppliers cut back.
By Dr. Cyril Widdershoven, who holds several advisory positions with international think tanks in the Middle East and energy sectors in the Netherlands, the United Kingdom, and the United States and held several senior publishing positions in leading energy publications such as Afroil, Middle East Oil and Gas, and North Africa Oil and Gas Magazine Cairo, and he continues to oversee the Mediterranean Energy Political Risk Consultancy. Originally published at OilPrice
- Expect lots of oil price volatility in the coming months as markets finally discover just how much spare capacity OPEC members really have.
- Oil production outages in Libya and the continued impact of Russia’s invasion of Ukraine are going to push oil prices higher if new supply isn’t found.
- While some analysts are predicting oil demand destruction in the near future, there is little evidence to back up those claims.
Global oil markets are going to be very volatile in the coming months if news emerging from OPEC’s main producers about production capacity constraints turns out to be true. OPEC will be meeting again in the coming days to discuss its export agreements, while today the oil group is presenting its Annual Statistical Bulletin (ASB) 2022. While the media is likely to be focused on rumors in the next 24 hours of a possible change in the export strategy of OPEC+, the real focus should be on whether or not the oil cartel is even capable of substantially increasing its production.
For years, OPEC producers have been the main swing producers in oil markets. With a presumed spare capacity of more than 3-4 million bpd, Saudi Arabia and the UAE have always been seen as a point of last resort in case of a major crisis in oil and gas markets. During the former global oil glut, it seemed nothing could threaten the oil market, even when major conflicts emerged in Libya, Iraq, or elsewhere.
The re-opening of the global economy after COVID-19, however, has brought fear back into the market that leading oil producers, including the USA and Russia, are unable to supply adequate volumes to the market. OPEC kingpins Saudi Arabia and the UAE are now being looked upon to increase production to historically high levels and bring oil prices down. Russia’s war against Ukraine, removing a possible 4.4 million bpd of crude and products in the coming months, has thrown this spare capacity problem into sharp relief.
This week, a possible doomsday scenario could emerge in oil markets, based not only on OPEC+ export strategies but also due to increased internal turmoil in Libya, Iraq, and Ecuador. Possible other political and economic turmoil is also brewing in other producers, while US shale is still not showing any signs of a substantial production increase in the coming months.
Global oil markets have long believed that OPEC has enough spare production capacity to stabilize markets, with Saudi Arabia and the UAE just needing to open their taps. There is, however, no real evidence to suggest that OPEC has increased production capacity in place in the short term. A research note by Commonwealth Bank commodities analyst Tobin Gorey already noted that OPEC’s two leaders are producing at near-term capacity limits. At the same time, UAE Minister of Energy Suhail Al Mazrouei put even more pressure on oil prices as he stated that the UAE is producing near-maximum capacity based on its quota of 3.168 million barrels per day (bpd) under the agreement with OPEC and its allies. That comment could still indicate that there is some spare capacity left in Abu Dhabi, but the remarks were made after French President Emmanuel Macron had stated to US president Biden during the G7 meeting that not only is the UAE producing at maximum production capacity, but also that Saudi Arabia only has another 150,000 bpd of spare capacity available.
Macron stated that UAE’s president Mohammed bin Zayed (MBZ) told him that the UAE is at maximum production capacity while claiming that Saudi Arabia can increase production by another 150,000 bpd. Macron also claimed that Saudi Arabia won’t have a huge additional capacity within the coming six months. The official figures for both OPEC producers counter this narrative, however. Saudi Arabia is producing at 10.5 million bpd, with official capacity between 12-12.5 million bpd. The UAE is producing around 3 million bpd, claiming to have a capacity of 3.4 million bpd. The two countries’ spare production is still officially slated to be around 3.9 million bpd combined. Most analysts, however, have been questioning these figures for years.
Looking at OPEC+’s own production targets, the group has not been producing at agreed levels for months. At the Middle East and North Africa-Europe Future Energy Dialogue in Jordan, UAE’s Al Mazrouei said that OPEC+ was running 2.6 million barrels a day short of its production target. That means a potential shortage in the market, which could increase even further if internal turmoil causes further production decreases. For July-August, OPEC+ agreed to increase output by another 648,000 bpd, which would mean that the total output cut during COVID-19 pandemic of 5.8 million bpd has been restored. Whether or not OPEC+ is able to reach that level in the coming weeks remains very uncertain.
Pressure will build in the coming days, as Al Mazrouei’s remarks seem to rebuke claims of a spare capacity shortage, but as always “where there is smoke, there is a fire”. A possible spare production capacity shortage, or non-availability at all, combined with an expected force majeure of Libya’s NOC in the Gulf of Sirte, and a suspension of Ecuador’s oil output (520,000 bpd) in the coming days due to anti-government protests, are likely to lead to an oil price spike.
There is still some optimism in markets about a real demand-supply crunch, as high inflation levels and a possible global economic slowdown could lead to lower demand. Until now, however, that optimism has not materialized at all, demand is still increasing, even though gasoline and diesel prices are breaking historical price levels. The re-opening of the Chinese economy, a natural gas shortage globally, and higher temperatures in the coming weeks, combined with the normal peak in demand due to the US and EU driving season, all look set to push oil prices higher.
OPEC’s future is at stake if spare production capacity really has run out. For years, analysts (including myself) have been warning about a lack of investment in upstream worldwide. That has already led to lower production capacity of independent oil companies, such as most IOCs, and for national oil companies, the situation appears to be similar. Even though Saudi Aramco, ADNOC, and some others, have been keeping their upstream (and downstream) investments level during the last decade (even during COVID), other main OPEC producers have seen dwindling investment budgets or even full-scale crises. Most OPEC producers could increase their overall production still, but only for a limited period of time. Where most spare production capacity is short-term based, partly to avoid damaging reserves in the long run, the current oil crisis is a much more prolonged long-term issue. Western sanctions on Russia, combined with existing sanctions on Venezuela and Iran, will hurt markets for years to come.
There is no quick-fix solution to the current oil market crisis, even the lifting of sanctions on Venezuela or Iran will not result in substantial volume increases. At the same time, increased Western political interference in the already struggling market will hit volumes too. The growing call in the USA, UK, and EU, to put a windfall tax on oil and gas companies will not only constrain further investments in upstream but will also lead to higher prices at the pump. Consumers are not going to feel any positive price effects and can expect steadily increasing energy bills in the coming months.
No statements made by OPEC in the coming two days are going to be able to remove the worries in the market. OPEC’s future depends fully on its power to stabilize markets. At present, there appear to be no options available to the cartel. Without new oil production hitting markets soon, OPEC leaders MBZ and Crown Prince Mohammed bin Salman need to try to maintain the illusion of spare capacity. If spare production capacity is revealed to be under 1.5-2 million bpd, the future of both OPEC and oil markets would be bleak.
35 comments
Comments are closed.
Thank you, Yves.
Your view echoes what my former employer’s head of oil and gas, a French Total oil engineer turned bankster, thinks privately. My current employer’s team is split between Amsterdam HQ and Chicago. I’ll find out the house and private views and revert.
Further to Macron, readers can watch https://twitter.com/RnaudBertrand/status/1541704208386166785?cxt=HHwWgsComeXzneUqAAAA.
My father worked in Riyadh from 1992 – 2015 and still has contacts there. As Saudi capacity diminishes, new taxes have been imposed. Subsidies, including allowances to royals and including barrels of oil in lieu of cash to royals, are being cut. Foreign workers may no longer bring spouses and minors with them. Subsidies to foreign workers, largely accommodation, education and flights, are also being scaled back. The kingdom is no longer the cash cow that it was. Some of the MBS changes were motivated by economics as much as the need to soften the kingdom’s image.
Thank you, Colonel but I was wondering about your last paragraph. I have been reading the same reports about an economic crunch time coming to Saudi Arabia the past few years which I am sure is totally unconnected with the fact that the country has to support 15,000 members of the Royal Saudi family. In that video above which Yves linked to, Scott Ritter says that oil countries like the Saudis are now swimming in money because of the high prices that oil is fetching which I believe is about $107 a barrel right now. So would this be just a matter of the Saudis now having breathing room with their financial problems or is this something long term do you think?
Thank you, Rev.
I think it’s the former. They have some short term breathing space from structural problems due to this year’s spike in prices, but are well aware of the decline of fields like Ghawar, which sits below the largely Shiite and restless eastern province, and a young, but often unskilled and unmotivated, population. The generosity of yesteryear has not been restored, but it’s early days and still to be decided, but there’s no hint of a a reversal, much to the chagrin of my father’s former colleagues.
Although there are that many princes and princesses (easy to generate when some princes have dozens of children, but only the descendants of the Sudeiri Seven and late king Abdullah matter at court and / or in politics) to support, much of the public was also indulged. In the latter part of Abdullah’s reign, it was estimated that 100k Saudis were studying abroad, a plan to train them for the future (aka saudiisation), keep the middle classes happy (saudiisation again) and reform from bottom up as well as top down. It was common for students to stay out for a decade, long enough to obtain citizenship (ideally US) and start a family (often an anchor baby and, ideally for the men, with a Scandinavian looking American wife as the progeny can fetch a good match and / or dowry).
I remember The Oil Drum from years ago. That blog made a pretty good case that Saudi Arabia big field Gharwar was pretty well watered out and they really didn’t have any good substitutes.
Thank you.
Please see my reply the Rev Kev and reference to Ghawar.
It’s also one reason why SA Basic Industries Corporation was partially floated, so that it could bring in investment and technology and expand its range of products and move up the value chain. KSA is aware of the need to do more than pump oil out.
Oh pleeze, pleeze let the oil flow UN diminished!
so much depends upon
a Saud oil barrel
glazed with dried blood
beside the dry well
I mean, IT’s DRIVING SEASON! Dontcha know?
I got places I have the RIGHT to GO! When I want to! And damn the co-virus! Full speed ahead!
Why so little mention of the effing stupidity of US ruling elite, which trashed Libya to pursue a vain hegemony and cut off Venezuela and Iran and now tries to strangle Russia, which turns out to be a much tougher guy than any of the would-be bullies/thugs in the
Free WorldCombined West? And I know “oil is fungible” and all that, but will the pain of this dislocation affect the whole human population evenly, or will there be areas that have established stability in their own spheres?As long as we’re alluding to William Carlos Williams:
This is just to tell you
I used all the oil in the ground
It was awesome
So fast and hot
Freedumb!
It’s like a ski tip caught in knee-deep powder… that long, s l o o w developer (but inexorable) crackup.
Yard-sale.
Gonna be a lot of pain and suffering in this long, protracted downward spiral.
Another factor is the reduction in worldwide refining capacity, which is now sitting at 100 million bpd nominal, but only 82 million bpd useful. US refining capacity is still almost a million bpd down from 2019 (18 vs 19 million bpd), while Russia’s 7 million bpd is likely not being fully utilized due to sanctions. That’s a big chunk right there and oil refining is typically run with minimal headroom.
I find it interesting that after decades of US oil engineers helping to develop the oil industry on the Saudi Peninsula, and after spending trillion$ to defend and protect those same oil interests, we still know so little about the various producers’ capacities that we just sorta have to guess. Great work by our CIA, DOD, State Dept., and DOE.
Isn’t it very possible that the US gubmint knows these production numbers but doesn’t like to release them?
Saudi’s increased their rig count by 145% in 2005 only to get 6.5% more oil. They have been down this road before. There’s plenty more advanced recovery techniques that have developed since then but they mostly pull production forward not give you more. They should be turning their country into a fortress to defend their reserves for when the US taps out on tight oil which is coming very soon.
Well, if someone’s got to go down, and it not to be one of the ‘west’ gang, then the Saudis are the next best thing. They had better buy S-400s fast.
Do I recall reading some time ago that the Saudi oilfields were booby-trapped with “dirty” bombs – radioactive dispersion devices – to prevent anyone accessing said oilfields if it wasn’t the Saudis?
US, Iran nuclear talks end in Qatar without deal: reports
With both Republican and Democrat opposition, it was unlikely Biden had the political credibility to rejoin the JCPOA anyway. They know an old lame duck when they see him.
Be sure to read the two Syraqistan articles in Links. Biden’s pivot to Asia looks to be stuck in eastern Europe and MENA.
Jerry cans need filling up, I guess. I was looking for a reason but contango is in the air.
Maybe have a couple extra quarts motor oil on the shelf too…
To me, this means we’ve gotta nationalize not just oil/gas but all energy production. All of it, because the price swings and crazy panic will unbalance our efforts to maintain a functioning society and economy. The current producers can’t make a profit as it is – profit enough to do all the capital investment necessary to keep it up and going. We need to admit this is now peak oil and we need to nationalize it. And if anybody marches down the street with a banner that says “Live free or die” let’s just let them die.
I’ve been a die hard libertarian my whole life until I came to understand the limited resource issues in front of us. I don’t trust the government at all but I do realize we need top down solutions to our future crisis’, a free market will just continue to efficiently eat up our resources faster. I’m for nationalizing oil and conserving its production so we can focus on what’s truly important like food etc. There’s a reason limits-to-growth modeling has a decrease in population numbers and its not people dying of ripe old age.
We don’t have a free market, we have a market that nationalizes losses to industry all the time, now it’s oil and armaments turn at the trough
Very good point! And that’s not the only sector that needs to be nationalized. Electricity, banks, pharma, cable, mining and agriculture all need to be brought under heavy management. The US definitely needs to institute an over all resource and industrial management program.
Well just My God Thank You for the Garland Nixon forum with Ray McGovern and Scott Ritter. It was spectacular. All the way through and especially the very last sentence by McGovern that he suspects that there is very very high level communication between the Russians and us dear old Americans (in spite of our silly propaganda) to the effect that we warn the Russians ahead of time – and therefore I assume they warn us… otherwise it could be “the Cuban Missile Crisis” times 10. My instinct about all this agrees. I thought both McGovern and Ritter were the very definition of truth in journalism in this interview and that Garland Nixon (of whom I’ve never been aware) is very skillful in bringing things to the crux of the matter and letting people who know what they are talking about actually finish their thoughts. It was so very excellent. Thank you.
Something is happening here. Something serious. People are avoiding the problems.
And not just everywhere. The reason I write here now, at this moment, is that I have been watching this post and I note, with sadness and seriousness that the normal stream of comments is not happening. It is possible that I am missing some points… .
Is somebody choking this site down? What is happening. I am concerned and I have been here for over twenty years.
Kind regards to all here.
Maybe it’s the effect of the heatwave?
If I sit quietly listening to any group of people born in and before the early 1950s discussing any topic, after a while someone will mention how they are glad they won’t be around to see how our current events turn out. The affirmative head nods are unanimous.
You’re correct Something is happening here but you must ask philosophers, psychologists and poets to explain why.
Meantime enjoy this great community as best you can.
My thanks to Yves and Dr. Cyril Widdershoven for this information.
Some pull quotes for me:
This much I understand. But I’m puzzled by
Paraphrasing Gazprom CEO Alexey Miller after Canada wouldn’t return refurbished equipment “If I’m selling less gas at higher prices, I would be lying if I said I wasn’t happy about that.” Yeah Biden has kinda sanctioned Russia out of OPEC+ but Russian oil is still flowing just to different locations. So what would cause the “bleakness”?
…US shale is still not showing any signs of a substantial production increase in the coming months. [thereby limiting Biden’s domestic options to bring more oil to the marketplace]
I’m somewhere between assigning blame to “trees don’t grow to the sky” and the stakeholders are using higher prices to pay down the credit card
From the modern T.S. Eliot and Ezra Pound crowd:
“Somethin’s hapinin’ here; what it is ain’t exactly clear…”
and:
“It’s the end of the world as we know it… and I feel fine!”
You mean I’ll have to drive a car that gets 87 mpg and the airplane to Europe will be a double-deck sardine can that goes 300 mph and charges by the pound?
God truly is dead and doom is just around the corner.
I watched (sound off, CC on, wishing I could turn the video off) the Ukraine Update interview. It’s my first ever Ukraine-related movie (I read articles) and I can say without qualifications I don’t like this information medium. I doubt I’ll repeat the experience. But thanks for the learning experience.
Be that as it may, nothing McGovern or Ritter said was a surprise to me … except Taiwan and the war with China.
I truly hope Ritter is wrong about the military occupation of Taiwan by the end of this year. Neither the people of the mainland nor the people of the island deserve that. I hope and believe reunification will be peaceful and graceful.
There is the possibility of war but I believe China will keep it at the perimeter of the first-island chain limiting it to an air-sea battle (ie no attacks on anyone’s territories) unless the mainland is attacked. I believe South Korea understands this and Japan is coming to the same understanding. Everyone else (ie non-7th Fleet hosts) is keeping their heads down.
Recalling The Oil Drum, the assertion was made at the time, as I understood it, that at some point there was an absolute limit to oil production rates, and when that point was passed oil prices would climb rapidly because supply had ceased to be upwards flexible. We have perhaps reached that point.
On a related note, I seem to have read enough hostility in some circles to fracking that I am not surprised that the drilling response has been limited. Investing in a fracking project, when the licenses may evaporate, may be especially speculative.
The general situation is getting worse. Just saw a Sputnik article that said that ‘US Strategic Petroleum Reserve Dips to Lowest Level Since 1985 Amid Biden’s Bid to Tame Gas Prices’-
https://sputniknews.com/20220629/us-strategic-petroleum-reserve-dips-to-lowest-level-since-1985-amid-bidens-bid-to-tame-gas-prices-1096805455.html
When the price of oil went into negative territory not that long ago, that would have been a great opportunity to sign contracts to get the Reserve topped up full but the article says that reserves only increased about 4 million barrels. And I see that the US is using about 20 million barrels of oil a day so 4 million barrels would be enough for what, five hours?
Poor stewardship led to this strategic risk Navy’s Red Hill debacle is both a warning and an opportunity
Refineries are operating at near capacity if not capacity and a new one hasn’t been built for a half-century.
I have to confess that I really don’t get it. They see that they are going to need refinery capacity – and nothing happens. They can see that there is only one icebreaker that the US really has – and none gets built. They see the US military runs out of munitions a coupla times – and do stupid things like cut back on the order for artillery rounds. And it is like this right across the board. And not just in the US either. Look at the coming crunch of the EU due to their sanctions regime. I have to admit that I am getting nostalgic for competency.
I live in Hawaii. The Navy is scheduled to deliver its formal plan for draining the tanks tomorrow.
https://www.hawaiinewsnow.com/2022/06/28/navys-plan-defuel-due-thursday-watchdogs-worried-about-delays/
OPEC was unable to increase their output in May, with production from seven out of thirteen members falling, and their production is now over a million barrels per day below their committed output..
details: http://focusonfracking.blogspot.com/2022/06/natgas-down-22-on-plant-outage-global.html
NB: Iran and Venezuela could produce much more if sanctions were lifted, but not soon..