OPEC Not Oil Market Savior, Even Under US SPR Threat
As US Democrats Senator Elizabeth Warden even stated the last days, not only OPEC is to be blamed, but also US based oil giants, such as ExxonMobil and Chevron, are now pushing for higher oil prices. During an interview of MSNBC Warden even stated bluntly that the US oil giants are enjoying high prices. The current political views held by US Congress and the Biden Administration are clearly heading for a collision course with hydrocarbon operators and traders. OPEC+ however, as it is a non-US based entity, and perceived as the main reason US citizens are paying higher gasoline prices, is in the crosshairs of Biden and even EU governments.
The fact that current oil and natural gas prices are high due to a lack of investments the last years, combined with an unexpected economy recovery the last months, is not even addressed. As has been proven the last decades, OPEC+’s real impact or power over crude oil prices is minimal, as higher energy efficiency, shale oil production or overall demand-supply issues have been ruling the sector.
With OPEC crude oil production hitting around 27.453 million bpd in October, its hold on the market is less strong that media indicated. It also has shown that OPEC is struggling even to reach the agreed-upon volume levels, as it feel short of the 400,000-bpd total output hike stated. The growing instability in the hydrocarbon markets, caused by unilateral energy-transition policies, is also not being acknowledged by OECD countries, especially the USA and the EU.
A call on OPEC, currently not a majority oil and gas provider in the market, is an outright fallacy, as the group, even including non-OPEC members Russia and others, has been increasing volumes the last couple of months, in the end without a real effect on price levels at all.
The main underlying reason for the current demand-supply crunch, which was already identified before COVID-19 or WTI prices went negative, is not caused by OPEC producers, but by a total mismatch and mismanagement of the capital investments needed to keep even current supply levels at par. Underinvestment and capital misallocation are the real culprits, which are mainly seen in Western markets or non-OPEC member producing regions.
At the same time that loose monetary policies, which are directed by national governments in OECD countries, are playing havoc, the same governments or international bodies, such as UN, IEA and EU, are calling for a full penalization of capital expenditure on fossil fuels. The ideological strategies at present have pushed energy consumers to the brink, leaving not only supply needs in the dark, but also forced increased divestments.
By investing in energy-transition, removing the backbone of hydrocarbon producers (investments), and building no pillars for a bridge between hydrocarbons and fossil-free renewables, an energy crunch has been put in place. Massive underinvestment in hydrocarbons, still the main pivotal energy and product source of the global economy, while not addressing popping up new bottlenecks (intermittency, power grids), security of supply is in shambles.
Overall massive investments have been pushed into non—productive activities or new energy projects, not looking at possible logistical or market fundamental issues related to the latter. To direct more money to relatively scare assets has put the backbone of the global economy on a shaky foundation. Price increases in the energy sector, not excluding renewables, is now a fact of life. As analysts have shown lately, the cost of a marginal barrel has increased 60%+ the last year, while supply and demand increased almost in par.
While blaming OPEC+, which is a hobby of Washington and Brussels, politicians forget that more than $600 billion (JP Morgan) or even around $1trillion capital investments are needed between 2021-2030. OPEC+ even stated in Abu Dhabi during ADIPEC2021 that total investments needed until 2045-2050 could be reaching $9.2 trillion, and $1.5 trillion for downstream. Western politicians forget a simple issue in oil and gas production, if you don’t invest enough overall production at the well level of a field will decline by 7-12% per year. To constrain investments will bite not only producers, but consumers/voters at the same time.
Political intervention at present, especially from the West, should not only focus on OPEC+ members and strategies. The ongoing QE strategies of OECD governments, especially USA and EU, are forcing artificial demand in the market for hydrocarbon products and fuels. Cheap available money is however not heading to energy production, but to consumers and industry.
The latter two are forcing demand for hydrocarbon up, way above normal demand growth factors. A combination of OPEC+ production constraints, and at present even technical unavailability of additional volumes in a growing part of OPEC+, is not behind price increases. To open up SPR volumes to curb prices is at the same time also not going to work.
SPR threats are falling on deaf ears in OPEC+ offices. A threat of a short-term SPR volume release to the market is being laughed at. Possible lower price settings even could result in the opposite, as availability of cheap oil and products only will be pushing global demand up further.
In the mid-term or long-run, SPR based policies are always going to bite the hand it feeds. When volumes are removed, especially if not in line with official SPR rules of engagement, the volumes will need to be replenished. So, bringing cheaper oil in the market right now is a short-term unrealistic option, as in ca couple of months the same SPRs will be entering again in the market to ask for new volumes, at higher prices.
OPEC does understand however a real issue is currently going to be playing a pivotal role. Western countries are heading towards multi-trillion investment schemes to renew or revamp infrastructure, such as presented by US president Biden. The EU Green Deal, in which form ever, will also be focusing on major infrastructural projects.
All will be increasing demand for oil and gas volumes the next decades, while emerging markets, especially India and Africa, are going to be pushing too. The grand-scale energy-intensive infrastructure plans to reopen national economies are without a doubt a major demand driver. OPEC(+) production however is and will not be able to increase in such a way the next couple of years to remove pressure on prices.
Thanks to Western governments mismatch with reality, and a drive to decrease hydrocarbon investments, no real solution in the short to mid-term are available. US shale is also not going to be the savior in the end, as the US companies are still looking at debt reduction and shareholder dividends. Another major factor, not understood at all by most people, crude quality is not in the hands of the US, but in the pockets of OPEC. As one analyst always has stated “Crude Quality Matters”, seems that even Houston or Washington-based politicians have not heard this enough.
As long as demand is up, even at $80 per barrel, and OPEC countries are fighting for their own future, Western governments need to become realistic. With OPEC’s reference (ORB) price levels still at around $68 per barrel, mainstream oil producing countries are still not recuperating their immense losses of the last years.
As several OPEC officials have clearly stated, to move the market and bring prices down, two things need to be implemented. The first one is to open up fully US oil and gas production, while secondly more investments are needed upstream. Both are not likely to happen soon, so Washington and Brussels should be taking a look in the mirror to see the real culprit of the current crisis. Pushing for oil and gas divestments in the West is the main reason for the crisis.
Current energy-transition deals will only make it worse for the next decades, as demand for hydrocarbons is still up until 2045-2050, reaching 108.4 million bpd or maybe more. Simple equation, if demand is up while supply is lagging, prices will be in the green (US$)