LAGOS, Nigeria (VOICE OF NAIJA)-The Organization of Petroleum Exporting Countries (OPEC+) has extended its oil production cuts this month, aiming to increase oil prices to $100 per barrel.
The decision came as no surprise, and unlike previous announcements on production policy, it successfully influenced prices.
However, its effectiveness is temporary, and OPEC will soon face the need for another decision.
OPEC anticipates a 2.2 million barrels per day increase in oil demand this year.
With the current production cuts in effect, this level of demand growth is poised to create a global market deficit.
Estimates of the deficit’s magnitude vary; the International Energy Agency (IEA) expects a ‘slight’ deficit due to the OPEC+ cuts and heightened demand caused by the situation in the Red Sea.
According to Qamar Energy’s Mills, there could be a deficit of up to 4 million barrels per day later this year.
If this occurs, OPEC could easily announce an end to the cuts, or make adjustments, to prevent a drop in prices.
During a deficit, it’s ideal to make adjustments as prices are high and demand remains strong. Any impact on prices from such announcements would be softened by market fundamentals. Since the cuts can’t continue indefinitely, especially with some OPEC members unhappy with quotas, adjustments are inevitable.
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Last year, oil traders were mainly concerned about demand, particularly in China.
This year, there’s a growing realisation that withholding 2.2 million barrels of oil daily while global demand rises will eventually impact supply. Oil prices are increasing.
However, certain OPEC+ members have exceeded their quotas and have been urged to compensate, often through temporary deeper cuts. Despite overproduction and increased output from quota-exempt Iran, Venezuela, and Libya, the cuts’ objective remains intact. Nonetheless, they cannot be sustained indefinitely.
In recent months, analysts have observed that OPEC+ will eventually need to begin reversing the production cuts, particularly if Brent crude surpasses $100 per barrel. These analysts argue that at that threshold, prices typically begin to suppress demand.
However, OPEC+ might decide to maintain the cuts until oil prices exceed $100, as suggested by the CEO of Dubai-based consultancy Qamar Energy.
Robin Mills, In a recent opinion piece for The National, Mills proposed that sticking with the cuts is one of the two options available to OPEC, despite potential outcomes like increased inflation and higher U.S. production.
The alternative path described by Mills involves OPEC trusting its own optimistic demand forecasts and gradually ending the production cuts. This viewpoint offers a perspective on the future direction. Similarly, one could argue that adhering to the cuts also demonstrates confidence in OPEC’s positive demand outlook: if demand remains robust and likely to grow, it can thrive even in a higher-priced market.
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In 2022, the Russia/Ukraine conflict drove oil prices above $100 per barrel, sustaining them at this level for an extended period. As a result, the annual average approached $95 per barrel. Demand surged by over 2.5 million barrels daily during this period, preceding China’s recovery from pandemic lockdowns, which ended later in the year.
While one might anticipate OPEC+ considering an end to its production cuts, it could be more prudent to maintain them, especially considering that reversing the cuts would likely have a similar impact on prices as news of over 1 million bpd growth in U.S. shale output last year.
Meanwhile, a recent report predicts that global oil demand could reach around 108 million barrels per day by 2030
Enverus Intelligence Research (EIR), a subsidiary of Enverus, has issued a new report asserting that global oil demand is unlikely to peak or plateau by the end of the decade.
Instead, EIR anticipates global oil demand to reach around 108 MMbpd by 2030. Their primary evidence includes the observation that fuel economy standards have fallen short of their objectives, and electric vehicle momentum in the U.S. appears to be slowing.
Rising costs of supply and the absence of new supply projects announced so far are poised to elevate oil prices, especially beyond 2030. This, coupled with efforts to reduce reliance on oil, may lead to peak demand in the next decade.
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Overall, EIR does not observe significant changes in per-capita consumption trends by region and product, nor does it identify the necessary divergence between economic growth and oil consumption that would lead to a peak in oil consumption before 2030.
The report author and director at EIR Al Salazar, says “Both OPEC and IEA global oil demand estimates require a significant change in consumption behaviour or a reversal of off-oil measures over a short period. History is not in their favour. Instead, we believe the rate of demand growth will gradually slow but not peak. However, the regional dispersion of the growth changes dramatically,”
“Our demand forecasts result in a world where OPEC’s influence on oil price strengthens, supporting the group’s preference for Brent prices of $85-$105/bbl,” said Salazar.
The report indicates a scenario where OPEC’s influence on oil prices strengthens, aligning with the cartel’s preference for prices ranging between $85 and $105 per barrel.