By now, OPEC+ countries have restarted about two-thirds of the production they halted in the early stages of the pandemic.
As demand tumbled when COVID-19 hit the world in March 2020 and the crude oil markets collapsed into negative territory, OPEC+ had no choice but to sharply cut 10 million barrels per day in production. That helped restore sanity in the markets.
With demand improving, crude oil prices firmed up rapidly. So OPEC+ came under growing pressure to open the taps and the organization is reversing its output cuts in stages. Despite that decision, reached at the OPEC+ ministerial meeting on Jan. 4, oil prices rose the next day and continued rising through the week.
Although there was some correction on Friday, prices finished the week higher. February West Texas Intermediate crude settled at US$78.90 a barrel on the New York Mercantile Exchange. According to Dow Jones market data, prices based on the front-month contract rose 4.9 per cent for the week. Brent crude crossed the US$80 mark and was hovering around US$82 a barrel.
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What does all this mean? Why, despite Omicron hitting the world and the OPEC+ announcement to increase output further next month, are oil markets still surging?
Several factors are in play. Oil climbed amid skepticism about whether OPEC and its allies can successfully raise output as much as they intend. Recent history shows the group has been severely limited in how much it can boost production. In December, OPEC+ added just 90,000 barrels a day, according to a Bloomberg survey.
Just 130,000 barrels a day of additional OPEC+ crude is likely to hit the market in January, followed by 250,000 barrels a day in February, said Amrita Sen, the chief oil analyst and co-founder at Energy Aspects Ltd. “Even if that headline number is 400,000, what’s coming to the market is half of that, maybe even less,” Sen said in an interview with Bloomberg TV before the Jan. 4 OPEC+ meeting.
Supply disruptions are also a factor and supply additions are reportedly not keeping up with demand growth.
Political issues are also beginning to strain the output. Supplies from Libya and Kazakhstan are under a cloud.
An uprising in Kazakhstan stoked worry that the crude supply from the OPEC+ producer could be disrupted.
Libyan output is also a question mark. There has been little movement in Libya since the cancellation at the 11th hour of elections scheduled for Dec. 24. There’s an eerily calm tension on the ground as various factions strategize. There has also been a production outage in Libya due to pipeline repairs.
So Libya is producing around 700,000 bpd – its lowest level in more than a year. Output has dropped from a high of 1.3 million bpd last year.
Russian crude production has also stagnated for a couple of months.
OPEC+ will probably struggle to reach its output target, as members including Nigeria, Angola and Libya continue to face difficulties in ramping up production, British bank Barclays reported. Even as OPEC+ boosts targets, “actual incremental supplies are likely to be much smaller, similar to the demand effect from Omicron,” the bank said.
Iraq also seems unable to meet its output targets. Its exports, including volumes from the semi-autonomous Kurdistan region, rose by just 0.5 per cent in December, despite an increase in its OPEC+ quota.
Despite new commitments by governments to reduce greenhouse gas emissions, fossil-fuel demand is set to surpass pre-pandemic levels, says Moody’s Investors Service. In a recent report, the rating agency said it expects energy demand to continue its recovery in 2022. But the matching increase in output appears missing.
If the signals are being read correctly, oil markets seem ready to break out of their long-term downtrend. This is a major change in market sentiments.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.
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