FEAR of OPEC Quota Increases is Way Overblown
This is from an article written by Irina Slav, one of the real experts on the global oil market. Read carefully what I've highlighted in red.
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Last Sunday, OPEC+ agreed to add 137,000 bpd to its collective oil output. This was the seventh monthly output hike decision by the group, and it came amid warnings of a looming supply overhang. Yet oil prices rose on the news. While counterintuitive at first glance, the market’s reaction actually suggested that rumors about a glut may be premature.
One reason why the output hike failed to pressure prices was its size. After several months of adding over 400,000 barrels daily, OPEC+ this time went for a much smaller increase, of the same size as its first one in April this year.
Another reason why the market’s reaction was, in fact, only to be expected, was the fact that while production has been rising within OPEC+ for the last six months, some of that rise has been on paper only. Some producer countries have taken longer to ramp up to their new quotas, while others, namely Iraq and Kazakhstan, have been pressured by the OPEC leadership into compensating for their overproduction previously. < As I have posted here many times, OPEC+ is increasing quotas NOT PHYSICAL SUPPLY.
“Due to overproduction across this subgroup of producers, the actual incremental increase to follow from today’s announcement will be substantially smaller than the headline number, with Saudi Arabia having the vast share of the remaining spare capacity, alongside materially smaller volumes in the UAE and Kuwait,” RBC Capital Markets’ Helima Croft said, as quoted by Barron’s in comments on OPEC+’s latest decision. < Helima Croft in the global oil expert at RBC Capital. She attends a lot of OPEC meetings and she is highly respected within the cartel.
Spare capacity is a central factor in the OPEC+ story and a favorite of oil price forecasters when they talk about a glut. The argument appears to be that because OPEC+ has all this spare capacity—concentrated in a handful of members—there is virtually no risk of an oil shortage, but there is a risk of oversupply because the group is now dipping into that spare capacity.
“What they’re doing is removing paper cuts from the market. There is a massive amount of barrels that are on paper being withheld from supply, but in reality, most countries don’t have the ability to bring those barrels back,” TD Securities’ senior commodity strategist Daniel Ghali told Bloomberg. Oil traders are clearly aware of that, hence the market’s reaction.
“They’re perhaps emboldened by the fact that oil prices have not fallen significantly since they’ve resumed bringing barrels back to the market, but this is actually quite a negative signal from an energy market perspective,” Ghali continued. “The silver lining, I think, is that the headline number that they’re giving 137,000 barrels a day is significantly overstating the amount of barrels that are actually going to hit the market.”
Once again, the analyst highlights the dominant mood among the analytical community about a looming glut. That mood is fueled by estimates of weaker demand coupled with growing production, with the U.S. and other non-OPEC producers routinely cited as drivers of the downward pressure on prices. But U.S. production growth is slowing down because of price weakness. Guyana’s is rising, but while a growing producer, Guyana is no Saudi Arabia. On top of it all, the European Union is planning more sanctions against Russia’s oil industry. While it would be safe to say the previous ones have had a rather limited impact on Russian exports, the news of more energy sanctions always cheers up oil bulls.
This is why oil prices did not slump after OPEC+ said it would extend its production ramp-up for yet another month. Everyone’s talking about a glut, but they are not convinced it is coming because the physical market data does not support such a conviction. Also, OPEC+’s declaration of 137,000 bpd more in production next month may remain of this size on paper only. There is also another reason why it pays to take these developments with a little bit of caution. OPEC+ could always reverse the hikes—and it has said as much. < Bottomline: There is NO WAY that Saudi Arabia allows Brent to stay under $60/bbl for long. Whenever you keep seeing the word "glut" being used by those who want lower oil prices, you know the oil price cycle is about to change. Low oil prices lead to more demand and lower supply, which eventually leads to higher oil prices. "Eventually" might take a big longer, but there is no way we see a glut of oil.
By Irina Slav for Oilprice.com
Read actual article: https://oilprice.com/Energy/Crude-Oil/OPEC-Latest-Hike-Casts-Shadow-over-Glut-Narrative.html
Dan Steffens
Energy Prospectus Group |
