The dynamics of the oil market are changing | OPEC
Earlier this month, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, a group known as OPEC +, announced their decision to stick to their planned production increase of 400,000 barrels per day in January.
The group’s decision came at a time of heightened concern for producers and consumers and highlighted new realities and changing dynamics in global hydrocarbon markets.
On December 2, the OPEC + countries met in a virtual meeting to decide between two scenarios: continue to increase their production volume or temporarily freeze it.
Apparently, many strong motivations led them to opt for the latter option: the excess supply expected in the first half of 2022; fears that a new strain of coronavirus could further reduce the rate of oil consumption; and the decision of the United States and a number of other countries, including India, China, Japan and South Korea, to release large quantities of oil from their strategic reserves into the market in order to reduce prices. However, despite strong arguments in favor of a freeze, the cartel decided to maintain its current production plan.
Several reasons motivated the cartel’s decision:
First, the current economic development strategies of the main OPEC + players (and in particular the Gulf monarchies) make the freezing (or reduction) of production quotas an undesirable scenario. In the long run, global demand for oil is expected to decline, drastically reducing the revenues of oil exporters and turning some of their oil fields into stranded assets. To avoid this, producers are working to diversify their economies and make renewables a viable part of their economic structures. For now, the only viable source of funding OPEC + countries have for their diversification efforts are their petroleum resources, and they are under increasing pressure to turn these resources into cash before the expected decline in demand and falling prices do not devalue them. This means that, for OPEC + countries, self-imposed production limits can only be temporary measures to stabilize the oil market and delay falling prices – in the long run it will always be more beneficial for producers. of oil to increase production volumes. .
Second, the amount of oversupply expected in the market in 2022 remains uncertain. Indeed, there is not unanimity among experts on the longer-term outlook for the oil market. While many expect the market to be in a significant surplus, encouraging more competition among players, others warn that continued underinvestment in the petroleum sector can prevent producers from responding significantly to demand. request. This means that OPEC + members are walking a bit blindly through a minefield and trying to avoid making bad choices that could result in a significant loss of income and halt their efforts to adjust their economies to the new post-oil realities. . Thus, they are reluctant to reduce production volumes, but they are also unwilling to increase them beyond the quotas already established, so as not to lower oil prices, especially since any period of shortage can easily be followed by a period of overproduction.
Third, OPEC + members know that even if they commit to sticking to their current production plan, they risk falling short of their production quotas. In November 2021, the difference between nominal production quota and actual production in OPEC countries was -390,000 barrels per day. In addition, under the pretext of respecting production quotas and individual interests, they refuse to compensate for the volumes by-produced by the other Member States. This has its own logic: Underproduction supports higher prices, which is particularly important on the eve of the expected market glut in 2022. It also allows producers to limit their cartel’s production volumes without irritating farmers. consumers.
Consumer power on the rise
Another major reason behind OPEC + ‘s decision not to freeze production quotas was its fear of angering major oil importing countries. Nowadays, oil consumers are gradually increasing their influence in the market. With the progress of the energy transition and the expected return of frequent excess supply to the market, it is increasingly demand, and not supply, that determines the dynamics of oil and gas prices.
Excess oil on the market is already expected in 2022 and by some estimates by 2030 there could be up to 10 million excess barrels per day on the market. Attempts by producers to put pressure on price trends by regulating production volumes are thus increasingly encountering strong reactions from consumers. But at the same time, oversupply expectations and high levels of market uncertainty provide producers with some leverage.
This change in the power dynamic between producers and consumers has already had an important consequence. On November 23, US President Joe Biden ordered that 50 million barrels of oil be removed from the US strategic reserve to help reduce energy costs. This move was important for several reasons.
First, with this move, the United States openly reclassified itself not as a producer, but as a consumer of oil – and it made it clear that it was not happy with the high prices and limited supply. . Of course, the US government has long had an influence in determining what goes on in the oil market. Since the mid-2010s (if not earlier), however, he was seen more as a producer, not a consumer. Indeed, even when Biden’s predecessor, former President Donald Trump, expressed dissatisfaction with OPEC + measures to tighten production quotas or criticized the cartel’s short-lived price war in 2020, OPEC + countries continued to perceive the United States primarily as an oil producer.
The United States began to behave more like a consumer than a producer for the first time earlier this year, when despite rising prices, its domestic shale producers abandoned their policy of pumping so much oil as possible in favor of a more growth approach to production. The current administration has done its best to encourage greater growth in domestic shale oil production, but has failed to change the minds of producers. By deciding to release significant reserves to lower prices, the Biden administration has made it clear that it supports the new position of the domestic industry and that it is now ready to act as a defender of consumer interests.
What made Biden’s decision to release reserves even more important was the fact that it was backed by several other world powers. Despite existing political tensions, the United States has succeeded in uniting a group of influential oil consumers who have long struggled alone against OPEC + production limits and the resulting price hikes. China, for example, sold off some of its own resets in the fall of this year, and India, Japan and South Korea have also recently expressed similar intentions. None of these Asian countries had used their oil reserves for such a global and coordinated price war in the past.
Not a war – yet
Of course, Biden’s decision on November 23 was not an outright declaration of war, but a demonstration of the newly acquired ability of consumers to affect the market. By its magnitude, the total volume of oil planned to be released from reserves does not exceed daily global demand (however, to balance it, OPEC + would have to abandon the increase in oil quotas for a while. production). In addition, the exit of the additional barrels will be phased, and a significant part of them should be returned by the sellers to the American reserve. There also remain questions about the commitment of the US’s Asian partners to release their reserves (so far only Japan has fully confirmed that it will take the step).
Nonetheless, for OPEC members, and in particular for the Gulf monarchies, the warning issued by their Asian consumers was significant. Considering the major role that Asia is expected to play in the future of the oil market, nurturing long-term positive relations with Asian powers will likely be essential for Saudi Arabia, UAE, Iraq, Kuwait and, potentially, Iran’s ability to maintain their positions in the oil market during this unstable period of energy transition.
As a result of all this, on December 2, OPEC + did not dare to freeze its production volume. Instead, he chose to give in – albeit cautiously – to consumer pressure. This means that we are now witnessing a new reality of the oil market, where producers are forced to take into consideration the wishes and interests of consumers.
The opinions expressed in this article are those of the author and do not necessarily reflect the editorial position of Al Jazeera.