Sopuruchi Onwuka

The taunt by international media outlet, Reuters, that the Organization of Petroleum  Exporting Countries’ coalition members (OPEC+) lose money by not flooding the market with oil at a time high prices might be based on very wrong assumptions that ignore credible predictions that underinvestment in the fossil industry would result in energy supply crisis. And high prices are the inevitable outcome.

In the article “OPEC+ output misses cost almost $21 bln in lost revenue in 2021, data show,” Reuters pointed at OPEC’s inability to meet its targets in 2021 by 800,000 barrels per day as the key reason for inventories in OECD nations plunging to a 7-year low.

The report also noted that commercial crude and product stocks in the United States are still some 100 million barrels below the 5-year range, saying that the historically below-average levels of crude inventories are in a large part a consequence of OPEC undershooting its supply commitments.

In citing data it had seen, Reuters reported that OPEC countries and non member coalition producers commonly called OPEC+ missed their oil production target by more 800,000 barrels per day (bpd) on average last year, “missing out on billions of dollars in revenues and hurting members of the group which have struggled to raise cash to invest.”

In its calculations, Reuters said the production deficit by OPEC+ comes with a missed opportunity for about $21 billion in lost earnings for the group in 2021.

But a separate analysis by The Oracle Today showed that there might not have been any loss but all gains by the producers whose market balancing measures are primarily aimed at restoring the market value of oil and gas after the demand destruction inflicted by covid-19 pandemic eroded petroleum value in 2020 and laid basis for grim market outlook for fossil fuels.

In fact, measured response to global petroleum demand by OPEC and its allies is focused on sustainable value recovery for the commodity, producing industry, workers, investors and exposed service providers including financial institutions. The value for the full stakeholder loop in petroleum industry is captured in the unit price of the commodity.

Our tracking of energy demand recovery as global economies reopen to largely vaccinated population showed strategic supply response to a new market shaped largely by sentiments for transition into cleaner energy options. The sentiments by climate activists and industrialized nations that seek independence from the oil market find force in concrete resolutions that commit world governments, institutions and businesses to divert all incentives from fossil oil investments to renewable energy development.

The consequent dismantling of funding structures for the fossil industry by multilateral lending institutions triggered the alarm button for both the industry operators and resource producing countries that operate the supply end.

Under the prevailing energy transition period, petroleum investment funds are acutely deficit; players are increasingly sensitive to fiscal and operating environment; producing countries prioritize domestic demand; and market blocs monitor demand drivers as wars and covid-19 upswings define demand direction.

Therefore, investment fund limitation has rapidly translated to reduced capacity for new production volumes. This expectedly narrowed the gap between capacity redundancy that normally emerge from regulated production quotas allocated to members of the OPEC+ coalition.

Again, with emerging economies positioned as the new destinations for future supplies and the hostilities from the economies that form the prevailing market, the resulting volatility arising from uncertainty of supplies entails that producers optimize current market opportunities by maximizing the value of the commodity.

Thus, the secretariat of OPEC, which currently coordinates activities for OPEC+, has maintained a cautious approach to supply.

The Secretary General, HE Dr Mohammed Barkindo, and other technocrats at the secretariat have meticulously laid agenda for all committees of OPEC+ to produce resolutions that guarantee that demand is constantly ahead of supply in order to avert market shocks similar to that of 2020.

Following global activity freeze associated with global lockdown to stall the rapid spread of SARS-COV-2 which caused the deadly covid-19 pandemic in 2020, the resulting supply glut in the oil market had led to steep plunge in prices which monetarily sank below $0 per barrel as traders sought to avert huge losses in tanker leases.

“We knew we had to act quickly,” Dr Barkindo says, referring to rapid rallying of OPEC and non OPEC producers including the United States on the need to salvage the global petroleum industry and associated financial institutions from imminent crash. The intervention had led to unprecedented cut of 9.7 million barrels per day from global oil supplies in order to buoy prices above cost of production. 

The scramble to save the industry, the market, financial institutions exposed to energy investments and even the market, led to the Declaration of Cooperation (DoC) which bonded OPEC with 10 other non-member producers led by Russia. The DoC also resolved the production rivalry between the key leaders of the coalition-Russia and Saudi Arabia-which kept prices vulnerable even before the pandemic struck.

After its record output cuts in 2020, the coalition now known as OPEC+ has been responding to demand recovery with measured restoration of production in a manner that ensures that there is adequate return of value for the commodity. The group declared at the end of 2021 that it would maintain a marginal production increment of 400,000 barrels per day on monthly basis from January 2022 until the pre-pandemic supply level is reached.

However, activating production increase after a period of low investment in replacing reserves and production declines proved tough especially in African plays where operations were hit hard by global funding freeze against fossil development financing.

Therefore not all producers have kept up with the rising output goals. And West African producers led by Nigeria and Angola have struggled with limited investment in new capacity, leading to low spare capacity as the coalition begins to assign them with higher production volumes.

The low spare oil production capacity was a problem that has continued to get worse with time as coalition members fail to meet their assigned monthly output quotas, widening the gap between nominal commitment to production numbers and actual output in terms of physical barrels.

Although the gaps in combined production is beginning to narrow with rising production in key OPEC countries, concern about capacity redundancy for the security of sustainable global supply remains.

The International Energy Agency predicted that oil demand is going to exceed pre-pandemic levels later this year as global economies rev up industrial activities. The latest market outlook by the agency reverses its earlier position that 2022 would see oversupply from impact of the Omicron variant of coronavirus on demand at a time of increased output from non-OPEC+ producers.

The early predictions of the IEA for 2022 contemplated full production from Russia and Saudi Arabia in a scenario that assumed that full pre-pandemic OPEC volumes were poured into the market. The projections also expected greater demand migration from the oil market into renewable energy in line with highly hyped energy transition and net zero commitments by global corporations. Thus, the bearish predictions were shattered by the resilience of oil in the global energy equation.

Despite the high sounding declarations at the 26th Conference of Parties (COP26) of the United Nations Framework Convention on Climate Change (UNFCCC) in Glasgow, United Kingdom, last December, global dependence on fossil has remained increasingly pronounced with high prices and calls for more production by same countries that lead campaigns for energy transition.

Given the envisaged supply gaps arising from falling investments in new petroleum development and slow growth of the renewable energy industry, market analysts have been consistent in their prediction that demand would propel oil prices above $100 per barrel. 

Market reports reviewed by The Oracle Today showed analysts pointing at demand driven price projections in the foreground of disparity between supply promises from OPEC and actual barrel delivery to the market.

Director of Intelligence at consultancy Enverus, stated in an article published in the Wall Street Journal earlier in the year that “These monthly [OPEC] additions are increasingly nominal. They are not fully backed by real barrels.”

Senior Analyst at OANDA, Craig Erlam, had stated that oil’s remarkable run is driven by very bullish fundamentals as disrupted supply struggled to keep up with strong demand.”

He noted that both the OPEC and the IEA have referenced the resilience of demand since the emergence of omicron, adding that the inability of OPEC+ to hit their production targets has led to one-way price action.

Martijn Rats of Morgan Stanley had predicted in a note to clients that Brent crude could hit $100 by the second quarter of this year and persist through next year, as global stocks of crude decline and investment in new production remain constrained.

Morgan Stanley projected global spare capacity to shrink from 6.5 million barrels to just 2.0 million barrels daily by the middle of the year as OPEC and its partners ramp up production to pre-pandemic production levels. The predicted decline in spare capacity, according to the investment bank, would push Brent above $100 per barrel.

More fundamental threat to long term supply resides in the deliberate moves to drain capacity for new petroleum production by global institutions. The resulting underinvestment, analysts insist, effectively stalls the opportunities to expand spare production capacity.

Dr Barkindo had in an interview with The Oracle Today stated that blocking investment funds against the petroleum industry translates to preparing grounds for global energy crisis. He warned that underinvestment would disable the industry against robust demand burst expected from global population growth by over 1.8 billion people by 2050.

He faulted forecasts that bet on a consistent decline in oil demand in favour of low-carbon energy, saying that projected contribution of renewable energy to the global energy mix by 2040 would be paltry 20 percent.

With surging demand and rising prices, there is a deep concern about the ability of the petroleum industry to produce as much oil and gas as the world still needs in spite of the drive for energy transition.

Dr Barkindo told The Oracle Today that OPEC+ has been maintaining and will continue to promote a balancing mechanism that returns fair prices for producers and also guarantees cost-effective energy for global economic growth.

He repeatedly declared that it has never been the intension of OPEC to drive oil prices to its current levels above $100 per barrel; saying that exorbitant oil price dampens demand.

But this time, there seems to be little OPEC can do about price jumps following geo-political tensions, trade and diplomatic disconnects that affect market supplies.

Unfortunately, Dr Barkindo declared at a recent industry summit in the United States that the oil producing bloc has no control over extraneous geopolitical factors currently influencing oil prices, including the ongoing Russian invasion of Ukraine and consequent economic sanctions raining on the OPEC+ member.

The Oracle Today reports that it is the supply concern arising from low spare capacity at a time of global demand surge that drives price volatility and spikes. The situation is worsened by the unfolding slow development and weak capacity of the renewable energy in closing gaps in the energy supply loop.

If the market had been well supplied and volumes have been chasing falling prices as the case in 2016 when Russia and Saudi Arabia had a production spar in the market, prices would have crashed and even the full capacity production of all OPEC+ members would not have earned them as much revenue as they gross at current rate above $120 per barrel.

Thus, the taunt in the Reuters’ report appears to goad OPEC+ producers into unleashing volumes that would water down the strong prices that currently rule the market. But the Reuters’ analysts paid blind eye to capacity limitations that are consequent upon global climate actions against fossil energy.

The Oracle Today reports that Dr Barkindo and his technocrats at OPEC have driven the best market response strategies for the coalition of producing countries, delivering the best value for the commodity and maximizing returns for all stakeholders in the global economy. The coalition has actually exceeded its goals of rescuing the market value of oil and gas from subcommercial level in 2020 to the glorious heights recorded in 2008.