OPEC+ Spare Capacity - June 10

OPEC+ Spare Capacity - June 10

Postby dan_s » Thu Jun 10, 2021 8:35 am

As I have posted here many time, it is not as simple as most people believe it is for OPEC to ramp up production.
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By Grant Smith and Javier Blas
(Bloomberg) -- As oil demand roars back from the pandemic
shock, the world may soon clamor for more crude from OPEC+. But
the coalition doesn’t have all the barrels it’s advertising.
Fuel consumption is expected to regain normal levels as
soon as next year. With international oil majors and shale
wildcatters keeping a tight leash on spending, consumers are
relying on the Organization of Petroleum Exporting Countries and
its partners to satisfy the extra demand.
On paper, the 23-nation alliance will still have a gigantic
5.8 million barrels of daily production off-line -- almost 6% of
global supply -- when it gathers next month to discuss whether
to revive more output.
But that figure is based on some questionable accounting,
including inflated baselines for several countries and outdated
capacity figures for others. Taking those factors into account,
the group may fall short of the official buffer by more than 1
million barrels a day -- a typical year’s demand growth in pre-
Covid times.
“If OPEC is to meet the rising call on its crude, then
spare capacity is thin by any measure,” said Bill Farren-Price,
a director at research firm Enverus. “Many of these countries
are in decline.”
How quickly the cartel will need to add barrels doesn’t
just depend on the economic recovery, but also hinges on
geopolitics. OPEC member Iran is holding nuclear negotiations
with the U.S. that, if successful, could revive its exports
after years of debilitating sanctions.
That could satisfy part of the demand growth anticipated
later this year, but may not be enough to completely fill the
impending supply deficit. If Iran fails to secure an accord,
pressure for other OPEC+ nations to open the taps will grow.

Questionable Accounting

The International Energy Agency warns that prices --
already above $70 a barrel -- will only climb further without
extra supplies. Yet there are two big reasons to doubt whether
OPEC+ spare capacity is as large as advertised.
First, Saudi Arabia and Russia -- by far the largest
producers in the group -- are measuring the amount they can
increase against the unusually high production levels they
briefly hit during last year’s price war.
Restoring the full 5.8 million barrels outlined in the
OPEC+ accord would require Saudi Arabia to return to 11 million
barrels a day, a level the kingdom has hit only a handful of
times in its long history as an oil producer.
Riyadh is more likely to revert to typical pre-crisis
levels near 10.3 million barrels a day, according to a person
familiar with Saudi thinking. This would fit the kingdom’s long-
standing policy of holding back about 1.5 million barrels of
daily capacity for emergency use.
The OPEC+ deal also bestows a maximum crude production
capacity of 11 million barrels a day on Russia. The nation
maintained total oil production above that level before the
pandemic -- including a type of light hydrocarbon known as
condensate.
While Russia doesn’t regularly disclose its condensate
production, Bloomberg calculations using OPEC+ data suggest it
pumped about 940,000 barrels a day of the light oil on average
from Sept. 2020 to April 2021. That would suggest the country’s
maximum crude capacity is closer to 10.4 million barrels a day.
“OPEC mathematics is always tricky -- they always use a
very high baseline for the cuts,” said Bjarne Schieldrop, chief
commodities analyst at SEB AB. “Saudi Arabia is likely to be
more cautious than returning to 11 million barrels a day. Their
average from 2015 to 2019 was closer to 10 million.”

Struggling Producers

The second factor is that a group of OPEC+ countries are
probably no longer capable of hitting their production
baselines, which are predicated on 2018 output. Several may even
struggle to increase beyond current levels, owing to years of
under-investment in their oil industries.
“Some of the OPEC+ countries such as Algeria, Angola, and
Nigeria may not be in a position to restore production to the
base levels agreed by OPEC+ back in April 2020,” said Bassam
Fattouh, head of the Oxford Institute for Energy Studies. “The
shock has hit investment and activity in their oil sectors.”
Angola’s output has slumped far beneath its official output
target, sinking to the lowest since at least 2007 amid steep
declines at its deep-water offshore fields. In Algeria,
officials openly fret that the country may cease to be a crude
exporter within a decade as investment cuts and mismanagement
take their toll.
Nigeria will soon struggle to boost production soon,
according to Enverus’s Farren-Price. The lack investment of
there is often compounded by sabotage of infrastructure, while
legislation regulating foreign participation in the oil sector
suffers chronic delays.
The deterioration in these countries could be partially
offset by gains elsewhere.
The United Arab Emirates and Iraq have managed to expand
production capacity in recent years, and together could add
about 2 million barrels a day from their July levels, according
to Bloomberg calculations based on data from the countries.
Yet the OPEC+ deal doesn’t simply allow them to fill in for
other countries that can’t fulfill their targets. The two
nations would need approval to increase output beyond their
maximum quotas. That that could run into resistance from other
members.
Even if the two are permitted the fullest possible
increases, Farren-Price estimates the group’s real unused output
potential to be 4.4 million barrels a day -- just three quarters
of its official tally.
“The buffer in the form of spare capacity is likely to be
lower than consensus estimates,” said Fattouh.

--With assistance from Julian Lee.
Dan Steffens
Energy Prospectus Group
dan_s
 
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