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Lackluster OPEC Quota Increase Won’t Solve Tight Oil Market | OilPrice.com

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Yesterday, OPEC and its partners led by Russia agreed increase its combined oil production by 100,000 bpd in September. Reports say the decision follows calls from the US and other big consumers for more oil. However, an additional 100,000 barrels a day probably won’t be enough to push prices down much further.

The production increase deal followed an agreement to add around 430,000 bpd each month through August this year to reverse the deepest production cuts in history, implemented in 2020 and totaling 9.7 million barrels per day. . It also follows a decision in June to increase the original 432,000 bpd to 648,000 bpd.

Once again, this decision was attributed to consumer countries led by the United States, which repeatedly urged OPEC to pump more oil to bring prices down. The problem is that only two OPEC members have the capacity to pump more oil than they are pumping now and that 100,000 bpd could remain on paper as well as 648,000 bpd.

Commodity analysts at Standard Chartered had predicted that OPEC and its OPEC+ partners would do the bare minimum in response to calls for higher output. That decision to add 100,000 bpd to combined production could well be seen as this low showing they are doing something to address consumer concerns about supply, but not so much that prices stagnate.

Due to the fragile balance between doing something that works and doing too much, oil markets are likely to remain tight for the next two years at least, analysts at StanChart said in its latest commodity roadmap. The good news for consumers is that next year may bring lower prices due to dynamics in demand.

Oil demand in the current quarter may have fallen by 100,000 bpd, StanChrt estimates show, while OPEC production over the past year has risen by 2.2 million barrels a day. The cartel and its partners should be careful about their next steps to avoid demand destruction through excessive prices and a tarnishing of reputations for holding barrels to keep prices high.

However, prices have more or less normalized in recent months, the report notes. Right now, Brent crude is trading just a few dollars above levels seen before Russia invaded Ukraine. This suggests that the market has absorbed the war premium, and fundamentals are back in the driver’s seat.

The big problem, then, seems to be the lack of means by most OPEC members to push output above current levels, even if they want to. In July, the last month for which there are official OPEC data, the cartel produced 234,000 bpd more than in June.

This was close to the original quota for OPEC under the OPEC+ agreement, which was 253,000 bpd. And that was the month OPEC was supposed to produce more than its original allocation of 253,000 bpd. It was not, however, and few of those who have been closely following the OPEC deal were surprised, given Nigeria’s chronic problems with pipeline theft and outages or the political situation in Libya, which has been causing outages. regular production for years.

Venezuela and Iran have been exempted from OPEC+ production cuts, but have other problems preventing them from making the most of their oil: US sanctions. Angola, like Nigeria, has a chronic oil problem, which in its case is the lack of investment due to the depletion of the fields, and Iraq also needs money to produce more oil.

So any increase in oil production coming from OPEC will come from Saudi Arabia, the United Arab Emirates and possibly Kuwait. Whether such an increase would be enough to drive oil prices much lower than they are now remains to be seen and would depend overwhelmingly on how demand develops in the coming months.

By Irina Slav for Oilprice.com

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