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Tuesday, January 25, 2022

Oil producers fail to keep up with demand, keeping prices high

Nearly two years ago, global oil producers hit the brakes and cut production drastically as the pandemic swept through the global economy. The sharp pullback was accompanied by the implicit promise that as factories reopen and planes get back into the air, the oil industry will revive as well, gradually ramping up production to help the economy return to its pre-pandemic state.

It doesn’t turn out quite right. It is more difficult for oil producers than expected to increase production. Members of the OPEC-plus cartel, which agreed to cut production by about 10 million barrels a day in early 2020, are typically well behind their rising monthly production targets.

“In many places, it is not easy to recover after production cuts,” said Richard Bronze, head of geopolitics at London-based research firm Energy Aspects.

Output in the United States, the world’s largest oil producer, is also slowly recovering from a one million barrel per day drop in 2020 as companies and investors hesitate to invest amid climate change concerns and price volatility. The Energy Information Administration predicts that U.S. crude oil production in 2022, despite growth, is likely to average half a million barrels a day below 2019 levels.

This global pattern of production lag helped drive oil prices to a seven-year high, spurring inflation that has become a political issue in the United States and elsewhere. Brent oil, the international standard, costs about $84 a barrel, while US benchmark West Texas Intermediate sells for about $82.

A long period when more oil was consumed than was pumped led to the depletion of tank farms to a low level. Investment in new drilling for new oil has also fallen to a multi-year low, although it is expected to rise this year. At the same time, demand is expected to rise strongly, reaching pre-pandemic levels this year.

“The oil market appears to be heading into a period with little headroom,” Martin Rats, an analyst at investment bank Morgan Stanley, wrote in a recent note to clients.

The gap between the OPEC+ announced target of nearly half of global oil production and actual production appears to be widening. The International Energy Agency, a Paris-based group of forecasters, estimated the deficit of 19 OPEC+ countries covered by quotas for November at 650,000 barrels per day. Energy Aspects predicts the deficit will hit just over one million barrels a day, or 1 percent of global reserves, this month and is likely to widen later in the year.

This shortfall can be problematic because politicians and some analysts may be overestimating how much more oil the group can add.

“OPEC Plus is seen as the main source of additional supplies,” Mr. Bronz said.

Of course, higher prices are likely to boost shale oil production in the United States significantly. The tight market also gives Washington an incentive to lift sanctions on Iranian oil sales by reaching an agreement on Tehran’s nuclear program.

Forecasters are divided on the outlook for oil, with the International Energy Agency saying in its latest monthly report for December that “much-needed relief for tight markets is on its way.” The Energy Information Administration predicts that oil prices will fall later this year.

However, countries like Nigeria and Angola lagging behind have become the norm as their oil industries struggle. A range of factors are driving production down in some countries, including political unrest, outdated regulatory regimes and pressure on international oil companies to rethink their investments to boost profits and reduce carbon emissions. This shift could leave developing countries dependent on oil revenues in the cold.

“There are a lot of basins that are simply no longer of interest,” said Gerald Kepes, president of consulting firm Competitive Energy Strategies, referring to the oil-bearing regions. In the eyes of international oil companies, even a country like Nigeria, Africa’s largest oil producer, “doesn’t make the list,” he added.

The giants of the oil industry have courted Nigeria for decades, investing billions of dollars, but production has been declining. According to the International Energy Agency, in November the country was supposed to produce about 1.6 million barrels a day, but fell short of that goal by more than 300,000 barrels a day.

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Behind the deficit lies a whole bunch of problems. Nigeria’s industry is suffering from damage to infrastructure caused by oil thieves and others, problems that the industry says have worsened in recent months.

International companies, including Shell, which has long been a major investor in Nigeria, are phasing out their presence in wetlands where their installations are vulnerable. Analysts say they are being replaced by smaller companies with less capital.

Without investment in drilling and technology, even the richest oil states will face production cuts. A case in point is troubled Venezuela, where industry neglect has reduced production to a relatively meager level of less than one million barrels a day—less than a tenth of Saudi Arabia’s—despite claims to have the world’s largest reserves of around 300 barrels. in a day. billion barrels.

Kuwait, the oil-rich Persian Gulf state, has reduced its capacity by about 18 percent in three years. Kamel al-Harami, a Kuwaiti analyst, said that the domestic industry “does not have the experience and knowledge to deal with old and old oil fields” but that public opinion resists bringing in international companies.

Analysts say even Russia, which is roughly tied with Saudi Arabia as the top producer in OPEC plus, is close to the short-term limit of what it can produce. Saudi Arabia, on the other hand, produces about 10 percent of the world’s oil and could produce more.

“Most OPEC producers are undercapacity,” said Bill Farren-Price, director of exploration at Enverus, an energy market research firm. “But Saudi Arabia is a different story – its appetite for active oil market management is unabated,” he added.

Every month since the start of the pandemic, OPEC+ members have met to set production quotas. Following a schedule agreed in July, the group plans to increase total production by 400,000 barrels a day every month, even if they fall short of their targets.

Hurt by gasoline prices, which have risen about 40 percent over the past year, the White House is hoping the Saudis and their allies will rush to open the throttle, but OPEC officials are not yet willing to cut quotas for those unable to hit targets and reassign them. to other countries.

“We must keep what they have been allocated,” Saudi Oil Minister Prince Abdulaziz bin Salman told reporters late last year. The alternative, he added, would be a monthly debate about “who gets what.”

Analysts say Saudi officials are reluctant to unilaterally increase production and risk destroying an agreement with other producers that gives them so much control. In addition, the lagging countries serve as a covert way to reduce the cartel’s output by helping the Saudis get high prices while increasing their own production.

And time may not be on the side of the Biden administration and others calling for more oil in the markets. As producers reach the limits of what they can produce in the coming months, “demanding OPEC to add more will become less and less,” Mr Bronze said.

World Nation News Deskhttps://www.worldnationnews.com
World Nation News is a digital news portal website. Which provides important and latest breaking news updates to our audience in an effective and efficient ways, like world’s top stories, entertainment, sports, technology and much more news.
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