Is A New Oil Price War Looming?
U.S. crude oil production broke another record in September, putting additional pressure on the OPEC+ group, which looks to keep oil prices above $80 per barrel by controlling “market stability.” The underwhelming OPEC+ meeting last week showed that there is dissent within the group about deeper cuts and production quotas. The Saudis rolled over their extra voluntary cut of 1 million barrels per day (bpd) and Russia – the leader of the non-OPEC allies in OPEC+ – pledged to deepen its supply cut to 500,000 bpd from 300,000 bpd. Some other OPEC+ producers announced additional voluntary cuts, which brings the total OPEC+ supply cut to 2.2 million bpd for the first quarter of 2024. That’s in addition to Russia’s 500,000 bpd cut via export reductions of 300,000 bpd of crude and 200,000 bpd of refined petroleum products, OPEC said. The OPEC+ supply decision, which the market found unconvincing, will likely erase the expected deficit early next year but leaves the question ‘what’s next’ unanswered, analysts say. Non-OPEC+ supply is growing at a faster pace than previously forecast and is being led by record U.S. crude oil production, which continued to soar despite a flat or falling rig count compared to this time last year. OPEC+ and its leader, Saudi Arabia, face the same oil dilemma – how to counter surging U.S. production and prevent it from unraveling the efforts of the alliance to prop up prices. Record-high U.S. oil production is a “huge problem” for OPEC+, Paul Sankey at Sankey Research told CNBC after last week’s OPEC+ meeting. The solution for Saudi Arabia could be to just flush the soaring non-OPEC+ output out by flooding the market with crude and thus sinking oil prices to levels below the U.S. profitability threshold, Sankey said. “We’ve more or less been saying potentially Saudi needs to just flush this thing out,” he told CNBC. The Kingdom is believed to have a production capacity of around 11.5 million bpd, and it’s currently producing around 9 million bpd. So Saudi Arabia could ramp up its oil output by around 2.5 million bpd – if it decided to – within six months, according to Sankey. The Saudis flooding the market with oil wouldn’t be all that surprising – they did so in 2014 and again in the price war in the early Covid days in 2020 when WTI oil prices went negative. Soaring U.S. oil production is becoming a “real problem for OPEC,” Sankey told CNBC. U.S. crude oil production hit a new monthly record of 13.236 million bpd in September, according to the latest data from the EIA released on Thursday. “The growth has not just been a Permian story. We’re seeing many shale basins that were flattish experiencing a revival,” Francisco Blanch, Head of Global Commodities and Derivatives Research at BofA, said on a call to discuss the bank’s energy outlook, as quoted by Reuters. BofA Global Research said last week in its 2024 outlook that “Recession, faster-than-expected US shale growth, and lack of OPEC+ cohesion are downside risks to oil prices.” Other non-OPEC+ producers are also ramping up production – including Guyana, Canada, and Brazil. Brazil was invited to join the OPEC+ alliance as of January 2024, but the biggest oil producer in South America will not have any quota and will not take part in oil production cuts. The lack of a unanimous group-wide cut with all members contributing is a concern about the OPEC+ unity, analysts say. “With the cuts only being supported by a handful of producers and with no additional cuts from Saudi Arabia, the failure to secure a group-wide agreement does not bode well for the group’s unity going forward – especially if demand continues to slow, forcing more unpopular and economically challenging decisions,” Ole Hansen, Head of Commodity Strategy, at Saxo Bank, wrote in a weekly note on Friday.
Saudi Prince Says Oil Output Cuts Could Extend Beyond March
Saudi Energy Minister Prince Abdulaziz bin Salman told Bloomberg on Monday that OPEC+ production cuts could extend beyond March 2024 if the market requires it, criticizing commentators for failing to understand the output deal. On November 30, eight members of the expanded cartel announced voluntary cuts of around 2.2 million barrels per day for the first-quarter of next year, including Saudi Arabia’s current voluntary cuts of 1 million barrels per day, as well as Russia’s 500,000 bpd voluntary cuts. That leaves us with “additional”, “voluntary” cuts of less than 900,000 bpd not already been priced in. Additional voluntary cuts were pledged from Iraq, UEA, Kuwait, Kazakhstan, Algeria and Oman. The market’s reaction to the OPEC+ voluntary cuts announcement was a further decline in oil prices. According to Reuters, investors were bearish on the crude ahead of the OPEC+ meeting and had already priced in their anticipation that cuts would not be enough to move prices higher. The Saudi energy minister has criticized the market’s response to the OPEC+ announcement, accusing commentators of wanting to be “conspiratorial” and failing to understand the deal. The Saudi prince suggested that this would change once “people see the reality of the deal”. The prince emphasized that the 2.2 million in output cuts would be delivered. “I honestly believe that the 2.2 million will overcome the usual inventory build that usually happens in the first quarter,” he told Bloomberg, noting that “we wanted the market to know there would be a phased-in approach” because the cartel does cannot predict what the market situation will be in the first three months of the New Year. That required the cartel to “be careful about what language we use”. In other words, curbs on OPEC+ production will be phased out only after consideration of market conditions.
ONGC and OIL in talks with BAPCO, JAPEX, and Mitsui to boost oil and gas production
State-run ONGC and Oil India (OIL) are in talks with Japan Petroleum Exporation (Japex), Mitsui and Bahrain Petroleum Company (Bapco) to collaborate on enhancing domestic exploration and production (E&P) activities. “Indian National Oil Companies (NOCs) (ONGC and OIL) have executed several agreements with International Oil Companies (IOCs) (ExxonMobil, Chevron, TotalEnergies) for collaboration in E & P activities and are also in discussions with BAPCO, JAPEX and Mitsui,” Oil Minister H S Puri said in response to a starred question in Rajya Sabha on Monday. Detailing the efforts made by the government to enhance India’s production of crude oil and natural gas, the Minister said the government has increased the net geographical area under exploration from 2.5 lakh square kilometres (SKM) to 5 lakh SKM. Besides, the “No Go” areas in exclusive economic zones (EEZ) have been reduced by almost 99 per cent, so 10 lakh SKM areas are now accessible in EEZ for E&P activity. “Total operational area (active) under various licensing regimes is 3,27,456 SKM which includes exploration and exploitation of unconventional hydrocarbons like Coal Bed Methane (CBM),” he added. Scaling up production Last month, ONGC organised roadshows in Abu Dhabi and Singapore, eyeing partnerships with global oil and gas companies for 25 offshore facilities in the next three years. The Maharatna company is embarking on an expedited development of multiple offshore fields over the next three years. Its objective is to establish more than 25 offshore facilities, layover 1,000 km of sub-sea pipelines, and create associated infrastructure, requiring an investment of $11 billion. The CPSU has increased its capex on E&P activities during FY24 to around Rs 10,000 crore, which is around one-third of the E&P major’s total capex for the fiscal year. Besides, it will incur a capex of around 10,000 crore annually for the next five years on exploration. On the other hand, OIL has plans to increase E&P operations to drill more than 60 wells in the current financial year from 45 in FY23. The company, which was accorded the Maharatna status last month, aims to surpass 4 million tonnes (MT) in crude oil production and 5 billion cubic meters (BCM) of gas output by FY25. E&P activity Ministry of Petroleum & Natural Gas (MoPNG) has signed a total of 311 production sharing contracts (PSC) involving 29 discovered fields, which includes one PSC signed for Panna & Mukta fields and 28 blocks under pre-NELP exploration blocks as well as 254 under the NELP regime with national oil companies and Private (both Indian and Foreign)/ Joint Venture companies. Also, thirty Revenue Sharing Contracts (RSCs) have been inked under DSF (Discovered Small Field)-2016 involving 30 Contract Areas. Since 2017, seven Open Acreage Licensing Policy (OALP) rounds have been successfully concluded with the award of 134 exploration blocks covering 2,07,691 sq. km. area for E&P activities.
Latest Cuts Leave OPEC with Fewer Options
Last week, OPEC and its partners from OPEC+ agreed to deepen and extend their production cuts into the first quarter of 2024. The move, almost unanimously seen as a means to propping up oil prices, did not have the desired effect. After an initial jump, benchmarks slid again, with Brent crude dipping below $80 per barrel on Monday morning in Asia. So, it seems that the cuts have, at least for now, failed in their purpose. Of course, the tighter supply may yet be felt on the market, but in the meantime, OPEC—and OPEC+—seems to be running out of options. And those that are left are painful ones. “The market is going to test Opec+ and whether $80 a barrel is really a floor they can defend,” Raad Alkadiri, an analyst with Eurasia Group, told the Financial Times. “The cuts being billed as ‘voluntary’ undermines the psychological impact for the market a little, but if the full cut is realized, its impact on the market should not be discounted.” Indeed, part of the reason oil prices went lower rather than higher last week despite the OPEC+ announcement was the suspicion that some of the cuts will remain so only on paper. The suspicion emerged after reports that OPEC members had internal disagreements about the production level they should be free to pursue. The total cuts for the first half of 2024 are set at 2.2 million barrels daily, equal to about 2% of global supply. A few years ago, this would have been reason enough for traders to pile into oil futures. Now, this is not the case. Some, such as Reuters’ Clyde Russell, argue that this indicates that oil demand is not as strong as OPEC says it is. Others, such as energy analyst Paul Sankey, suggest OPEC could do a U-turn and sink prices to neutralize the rising output of U.S. drillers. Physical oil demand and its relation to the oil futures market are at the heart of it all. OPEC has been upbeat about that, just as the International Energy Agency has been increasingly pessimistic about it, recently forecasting peak demand growth before 2030. At the same time, there has been a multitude of reports and forecasts projecting weak economic growth for the world in the immediate future. With such projections, it is easy to understand why traders are turning bearish after the initial shock of the latest war in the Middle East wears out. It’s even easier to understand after Bloomberg reported that as much as a fifth of what we collectively think of as traders are actually computer algorithms. Commodity trading advisors use algorithms to track the market and place bets on various commodities. In oil, the trading volume of these algorithm-driven trades constitutes 70% of the total daily average volume on a given day, per data from JP Morgan and TD Bank, cited by Bloomberg. This means that the futures market has got even more divorced from the physical market for oil than before. And that, in turn, means that OPEC could be driven to desperation as algo traders, which Bloomberg notes are trend followers and trend exaggerators, ignore any attempt by the cartel to control oil supply, and, as a result, prices. This would prove a dangerous situation, especially for U.S. producers that have set another production record this year even though growth has been slower and more moderate than in previous growth years. Indeed, this is what Paul Sankey suggested to CNBC last week: that Saudi Arabia may simply decide to reverse course and open the taps to flood markets with oil. The question is whether it can afford to do so with all its expensive energy transition plans. On the other hand, OPEC in general, and Saudi Arabia specifically, can simply cut even deeper if the price of oil in the first quarter of 2024 comes across as unsatisfactory. It would be a risky move, given the market reaction to this latest cut. But it could be the less risky move compared to the above alternative. According to Reuters’ Russell, a big part of the market’s skeptical reaction to the cuts was the news about internal disagreements in OPEC. Apparently, these suggest that not all members of the group would actually follow through with their cuts. On the other hand, many OPEC members have been underproducing even with their original quotas—and prices have still declined. It is certainly a complicated situation for OPEC. The more often it cuts production, the more traders would question the outlook on oil demand, as suggested by the latest cuts. On the other hand, there is a divide between the physical market and the futures market. The physical market looks quite healthy based on seaborne oil volumes, which are up by 1.86 million bpd so far this year, per Kpler data cited by Russell. The futures market appears to be dominated by automatic trading, which affects prices in a major way. In any case, next year will be interesting to watch on the OPEC front.