OPEC+ faces an uncertain future amid slackening global oil demand and waning co-operation
Slackening global oil demand and a lack of co-operation among member nations are raising concerns about the future of OPEC+. Per Lekander, managing partner at Clean Energy Transition, recently highlighted the challenges faced by the oil cartel, warning that its breakup may be on the horizon.
As the world grapples with shifting energy dynamics and climate crises, OPEC+ finds itself navigating a delicate balancing act between output cuts and rising demand. “In a growing market, time is your friend. You just need to wait a bit and things tighten up and improve,” Lekander said. “In a declining market, time is your enemy. You have to keep cutting, keep cutting, keep cutting.”
The more negative growth [there] is, and the less co-operation you have – and remember the last OPEC decision, it was really the Saudis doing it on their own – so I would say, if my forecast is correct, and I’m very sure it is … (OPEC+) is going to break,” he added. “If the cartel can’t operate, I would say short-term you go to $35 and mid-term probably $45.”
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OPEC+ has been diligently working to stabilize global oil markets by reducing output since November. In addition to coalition commitments, several OPEC+ members are now implementing further discretionary output declines of 1.66 million barrels per day until the end of 2024. In addition, Saudi Arabia and Russia are implementing an additional one million barrels per day (bpd) and a 500,000 bpd drop in their output over July and August, respectively.
To put a floor under the markets, Riyadh reinvented itself as the swing producer of the energy world – producing only as much as required by the markets.
However, these efforts come at a cost, with Saudi Arabia bearing the brunt of the economic impact. How long Riyadh will be able to maintain this position as a swing producer is difficult to say. Output cuts are already taking their toll on the Saudi Arabian economy, as it saw a huge fall in growth projections for its economy, from 8.7 percent last year to 1.9 percent in 2023.
Major oil companies, including Exxon and Chevron, are expected to report profit declines due to weaker oil, gas, and petrochemical margins. Their increased investments in “New Energy” technologies underscore the transformation occurring in the energy sector. Even the once-resilient petrochemical industry, once a safety net for oil majors, is facing a downturn due to oversupply and stagnant consumer demand, leading some experts to compare it to the 2008 Lehman Brothers crisis, Alex Kimani wrote in his piece in Oilprice.com.
Canada is not immune to the turmoil. To strategically ‘distance’ itself from its liquid business, Calgary-based TC Energy Corp. has announced the divestment of its pipeline business into a separate, new entity, indicating a strategic shift away from liquid energy.
Long-term forecasts from various organizations, however, including OPEC, the Energy Intelligence Group, and the Energy Information Administration (EIA), predict continued growth in global oil demand. These projections point to a steady rise in consumption throughout the next few decades, suggesting that discussions about the demise of OPEC+ may be premature.
The world is consuming more crude than ever, according to Bloomberg’s Javier Blas. Over the past few weeks, global oil demand has surpassed the monthly peak set in 2019 before the Covid-19 pandemic. In the last weeks of July, the global consumption hit 102.5 bpd, above the 102.3 million bpd registered in August 2019, Blas added.
OPEC+ officials and the Paris-based International Energy Agency are pointing to a potential supply crunch in the second half of the year. OPEC has just raised its 2023 oil demand growth estimate by 100,000 bpd compared to last month’s forecast. In the long term, OPEC’s outlook to 2045 sees global oil demand rising to 110 million bpd.
The Energy Intelligence Group believes that not only will oil demand grow in 2023 but it will continue doing so until the end of the decade. Global oil demand, it said, will hit 101.2 million bpd in the current year and will continue growing to hit 106 million bpd by 2030.
No less than 10 organizations, including Exxon Mobil and the Energy Information Administration (EIA), have predicted that global oil demand will grow over the next few decades.
Markets are already firming up. Reuters reported that oil prices rose on Friday and notched a fifth straight week of gains as investors were optimistic that healthy demand and supply cuts will keep prices buoyant.
The impression of tightness may be an artificially created one, courtesy of the output-cut tactics of major oil producers. Yet this seems to be working.
While OPEC+ faces numerous challenges in balancing oil supply and demand, the fate of the oil cartel remains uncertain. As the energy landscape continues to evolve, only time will reveal the true implications for OPEC+ and the global oil economy. For now, the question of its potential demise remains open-ended, dependent on a complex interplay of market dynamics and international co-operation.
Toronto-based Rashid Husain Syed is a highly-regarded analyst specializing in energy and politics, with a particular emphasis on the Middle East. Besides his contributions to both local and international newspapers, Rashid frequently lends his expertise as a speaker at global conferences. His insights on global energy matters have been sought after by organizations such as the Department of Energy in Washington and the International Energy Agency in Paris.
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