Two months from now, OPEC+ is supposed to start unwinding the oil production cuts it agreed in 2022 and aimed at keeping the price of oil palatable for the members of the group. The start of unwinding is not a certainty, however. To some, this is a sign of OPEC’s growing irrelevance. In reality, that’s wishful thinking.
OPEC+ has been withholding over 5 million barrels daily in crude oil production for three years now. It had scheduled a gradual relaxation of these cuts aimed at restoring output without tanking prices. That relaxation never started, however, because traders in the oil space have remained overall bearish on the commodity, what with all the peak demand projections, notably for China, and the U.S.’s steady output increase—along with a few other non-OPEC producers.
It is the latter argument that some observers pick to demonstrate OPEC and its OPEC+ partners’ risk of becoming irrelevant to the international oil market or, as one Reuters commentator put it, lose control of that market.
In a column this week, Ron Bousso wrote that the outlook for oil demand was unlikely to change in the immediate term, which would likely discourage OPEC from starting the cut unwinding, and that, in turn, would erode its clout over the global oil market further. He noted Trump’s tariff offensive as one big reason for this bleak outlook on demand, and indeed, many have done the same, pointing to China’s introduction of a 10% import tariff on U.S. crude in response to Trump’s introduction of a 10% additional tariff on all Chinese imports.
Yet, the United States is by far not the only supplier of crude oil to China. It is not even the biggest one. China will probably be importing less U.S. oil while the tariffs last, but it may well raise its imports from other sources. As regards China’s supposed oil demand growth peak, for now it looks more like this growth is moderating after a couple of truly booming decades. No country could maintain the same rate of growth in the demand for anything forever. This simple fact, however, appears to elude most oil market commentators.
Elsewhere, meanwhile, growth appears to be promising, judging by news reports such as this recent one about BP and its intention to quit its energy transition targets and focus once again on oil and gas. A move as radical as this inevitably begs the question of why. The answer is that oil and gas are profitable, and the transition is not. If oil and gas are profitable, then there must be some pretty solid demand for them, and, at least according to Elliott Management, this demand will not die anytime soon.
Wood Mackenzie, a vocal forecaster, recently projected a scenario where global oil demand grows strongly in the next decade, or at least, more strongly than hitherto expected by forecasters. “Stronger-for-longer oil and gas demand would have huge implications for the upstream industry responsible for delivering the supply,” Wood Mackenzie analysts wrote.
With the transition struggling in the past couple of years and no sign of change in sight, that scenario is looking increasingly likely. The world is going to need more oil for longer. The U.S., Canada, and Brazil, and Guyana will not be able to cover that demand on their own. OPEC, then, and its OPEC+ partners are not really at risk of losing their relevance in the observable future. They still account for over 40% of global oil supply together—and U.S. shale is not growing at a breakneck speed anymore, oil prices be damned.
The U.S. Energy Information Administration forecast that non-OPEC producers will add a collective 1.8 million barrels daily in output this year, which would be 200,000 bpd more than the growth rate for demand for oil that the EIA projects for the year. In other words, OPEC+ will need to keep the lid on its output because non-OPEC supply will cover that—and then some.
Yet, if one adopts a perspective that goes further into the future than the next 12 or so months, it is OPEC and its OPEC+ partners that have the spare capacity to respond to any continued sustained growth in the demand for crude oil. It is OPEC and OPEC+ that still have some of the lowest production costs in the world despite decades of development.
It is a fact that the U.S. is the largest producer of crude in the world and likely to retain the top spot for years to come, and yet it is also a massive importer of crude because of the specificities of its own oil—this often gets overlooked in oil supply balance forecasts that predict OPEC’s slipping into the oblivion on history. Finally, it bears noting that OPEC still has the nuclear option: flooding the market to deal with competition. It’s true that this option has become potentially quite painful for the group, but that doesn’t mean it has disappeared.
By Irina Slav for Oilprice.com
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