December 4, 2021

U.S. oil producers pose ’emerging threat’ after OPEC+ defies calls to speed production increases

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Major oil producers on Thursday refused to accelerate plans to gradually lift oil production each month, raising the potential for the U.S. to take advantage of prices for the commodity, which trade close to multiyear highs.

Time will tell if oil prices continue to climb and “whether or not improved economics will induce companies to reconsider spending plans that have been restrained by the capital markets’ reticence toward fossil fuels,” said Andy Brogan, global oil and gas leader at professional services network EY.

If capital does start to flow back into the oil field and production from non-OPEC countries, which include the U.S., starts to climb again, the Organization of the Petroleum Exporting Countries and their allies, together known as OPEC+, will “have to make a decision about how to respond,” said Brogan.

OPEC+ reaffirmed their previous decision on production levels at a videoconference held Thursday, and said the group will raise the monthly overall production by 400,000 barrels a day in December. The group ignored pleas by the Biden administration and others to pump more.

At a meeting in early October, OPEC+ kept the agreement reached in July to gradually raise monthly oil production by 400,000 barrels a day from August. The goal of the deal is to eventually phase out the remaining production cuts put in place last year. The October decision included a 400,000 barrels-per-day increase in November.

The next OPEC+ ministerial meeting is scheduled for Dec. 2.

‘Falling short’ on output targets

The reality, however, is that OPEC is “falling short on its targeted supply growth,” Peter McNally, global lead for industrial metals and energy and vice president at Third Bridge, told MarketWatch.

Overall OPEC+ output climbed by 470,000 barrels per day in September, but the 19 members with production quotas under the OPEC+ supply accord were a combined 570,000 barrels per day below their allocations for that month, according to an S&P Global Platts survey released on Oct. 11.

S&P Global Platts said that while some OPEC+ members have “ample” spare output capacity, such as Saudi Arabia, Russia and Iraq, several other countries face significant operational disruptions, many due to damaged infrastructure.

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Still, Ann-Louise Hittle, vice president, macro oils, at Wood Mackenzie, said that OPEC oil production has already increased sharply this year, to 27 million barrels per day in the third quarter, from an average 25 million barrels per day in the first quarter.

“These volumes have helped the market remain relatively balanced until this quarter, when we see a moderate seasonal implied stock draw,” she said in comments to the media.

And as it “becomes clearer the world is going to survive the winter with enough oil to meet demand, we expect prices to fall from the recent highs of $87 to $85 per barrel for Brent,” said Hittle. “This process may be already under way.”

In Thursday dealings, oil prices saw volatile trading after the OPEC+ decision. January Brent crude
BRNF22,
-1.07%

BRN00,
-1.07%,
the global benchmark, traded at $82.03 a barrel, up 4 cents, or nearly 0.1%, on the ICE Futures Europe exchange. U.S. benchmark West Texas Intermediate oil
CLZ21,
-1.55%

CL.1,
-1.55%
was down 16 cents, or 0.2%, to $80.70 a barrel on the New York Mercantile Exchange.

On Oct. 26, Brent settled at $86.40, the highest front-month contract finish since October 2018, while WTI ended at $84.65, the highest since October 2014.

U.S. stands as an ’emerging threat’

McNally pointed out that there’s been “lack of response” from U.S. producers, even as “current trends in demand recovery and from key producers imply that crude inventories will continue to be drawn down on an absolute basis.”

The production level in the Lower 48 U.S. states is still 1.5 million barrels per day below the pre-COVID peak, said McNally. “The recovery in drilling activity remains anemic as U.S. producer are spending more returning cash to shareholders through dividends and share repurchases than reinvesting in drilling oil wells for new production,” he said.

However, Third Bridge expects to see an “emerging threat on the horizon” if U.S. producers choose to pushing drilling activity higher.

President Joe Biden has blamed Russia and OPEC for the climb in gasoline prices in the U.S. and called for OPEC+ to pump more oil.

Read: Why consumers will be paying a lot more for natural gas this winter

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Biden has been unsuccessful in getting OPEC to increase output sooner, but “will he turn to spurring domestic producers, despite his administration’s environmental priorities?” said Rob Haworth, senior vice president at U.S. Bank Wealth Management.

The U.S. and other nations may also choose to release oil from strategic petroleum reserves to make up for any deficits in supply.

“China has already responded to high commodity prices by releasing volumes of strategic petroleum reserves, and the U.S. is discussing a similar maneuver,” said Louise Dickson, senior oil markets analyst at Rystad Energy, in a Thursday note.

Weekly ending stocks of crude oil in the U.S. SPR has edged lower, standing at about 612.5 million barrels as of the week ended Oct. 29, down from 638.1 million barrels for the week ended Jan. 1, according to Energy Information Administration data.

Haworth said that for now, oil-market supplies are likely to “stay on the low end of average, maintaining support for prices which are the highest since 2014.” A return to the office in the U.S. over the next few months should also “build the demand side of the equation, providing further support for prices, despite expanding supplies.”

U.S. gasoline prices to hold above $3 a gallon

The OPEC+ decision came as no surprise, and will keep oil prices from falling, said Patrick De Haan, head of petroleum analysis at GasBuddy.

Had OPEC+ decided on a larger increase, that would likely have led to “slightly lower prices at the pump here in the U.S., in time,” he said.

But really, the only chance the U.S. has to see lower gasoline prices is “time,” said De Haan. OPEC+’s monthly increases will help, but “improvement in the energy crunch overseas, mainly China and Europe, would offer better changes for lower prices.”

On Thursday, the average U.S. price for regular gasoline stood at $3.406 a gallon, according to GasBuddy.

Read: This city recorded the U.S.’s highest-ever average gasoline price

“Even under the best possible scenarios for motorists, I see little chance of the national average falling under $3 a gallon this year,” De Haan said.

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