In
1973, OPEC’s Arab producers launched an oil embargo against the U.S. for
supporting Israel in the Yom Kippur war. The embargo also affected the UK,
Canada, Japan and the Netherlands. By the time the embargo ended in March 1974,
oil prices had surged from $3/bbl to $13/bbl. By nationalizing its assets and
then restricting supply, OPEC established oil as a powerful weapon to wage
economic war and to achieve political goals. The embargo exposed the weaknesses
of net importing nations, creating a fundamental shift in the power structure
between the Middle East and Western countries.
Change
in strategy. Between June 2014 and June 2015, OPEC flooded
the market with crude, causing international oil prices to fall by $60/bbl, in
a quest to force U.S. shale producers out of business. The Saudis and their
neighbors in Qatar, Kuwait and the United Arab Emirates had the financial
fortitude to withstand lower-priced crude to force out smaller producers, whose
lifting costs are much higher than in the prolific Middle Eastern fields. OPEC
was willing to cut prices to maintain their significant share of global crude
markets, rather than cede ground to the U.S. and other non-OPEC producers.
Back
to supply reduction. In the first quarter of 2024, OPEC’s global
market share has reached a new low, as the cartel holds back production to
support prices, Fig. 1. This is beneficial for producers outside the
alliance, especially the U.S. majors. OPEC+ has extended its production cuts of
1.7 MMbopd into the second quarter of this year. This has resulted in an
increase of $5/bbl to forecasted price for the remainder of 2024. The result is
Brent is now expected to average $85/bbl for the remainder of 2024 (Rystad).
Voluntary cuts are expected to continue, preventing stock accumulation and
keeping the market in deficit, adding to pressure. With OPEC striving to ensure
the market does not get oversupplied, companies in the oil-rich shale plays
have a green light to produce more crude, to reap the reward with reduced fear
of a price collapse.
Demand
is increasing. Strong demand growth in the second
half of this year is expected, due to Asia and the resilient U.S. economy, even
amid high interest rates. The market will remain in deficit for the remainder
of this year, even if OPEC+ unwinds the cuts at the end of the second quarter. The
voluntary crude reductions will reduce OPEC+ output to approximately 34.6 MMbopd
in the second quarter of this year before increasing to around 36.3 MMbopd in
the second half of the year, assuming the cuts will not be extended into the
third quarter.
Saudi
Aramco perspective. At this month’s CERAWeek by S&P
Global conference, Saudi Aramco CEO Amin Nasser said the world is using more
oil and that demand is outpacing supply again, raising questions about how soon
global consumption will peak. The unabated thirst for crude contributed to an
increasingly confident tone from Nasser, who said he expects consumption to
rise for many years to come. “We should abandon the fantasy of phasing out oil
and gas. Instead, we should invest in oil and gas adequately, reflecting
realistic demand assumptions, as long as essential,” Nasser emphasized.
U.S
production hits another record high. This approach directly
benefits the U.S. shale sector. In February, U.S. production set a monthly
record high at 13.3 MMbopd, Fig. 2. The EIA data indicate that U.S.
crude oil and condensate production averaged 12.9 MMbpd in 2023, breaking the
previous U.S. and global record of 12.3 MMbopd, set in 2019. However, EIA said
that the 2023 oil production record is unlikely to be broken by another nation
anytime soon, due to others failing to reach a 13-MMbopd production capacity.
Saudi Arabia pulled back on plans to increase production capacity to 13 MMbopd
by 2027, reducing the kingdom’s chances of breaking the record in the near
future.
EIA
reported that the U.S., Saudi Arabia and Russia accounted for 40% of global oil
production in 2023. This equates to 32.8 MMbopd. These three countries have
produced more oil than any others since 1971. Russia also suffered a decline in
oil production since holding the record set in December 2017 of 11.45 MMbpd. Voluntary
cutbacks contributed to Russia’s decline, but it appears that much of the reduction
was caused by sanctions imposed in response to its invasion of Ukraine. Meanwhile,
Saudi Arabian production peaked at 11.04 MMbopd in September 2022.
Extraordinary
restraint. Despite this trend, OPEC+ does not appear to
be overly concerned. Analysis suggests that by June this year, OPEC+ crude
(excluding Iran, Venezuela, Mexico, and Libya) and the group’s share of global
liquids supply are projected to drop to their lowest points since the formation
of the OPEC+ alliance in 2016. In the middle of the oil price war in April
2020, OPEC+ crude accounted for 41.4% of global supply. After the massive 10-MMbopd
cut, that share dropped to 35% in May 2020. Since then, OPEC+ has gradually
regained market share in 2021 and 2022, as official cuts were gradually
unwound.
Further
market share losses. Following implementation of the 2-MMbopd
production cuts in October 2022, the 1.16-MMbopd voluntary cut in April 2023,
the 1-MMbopd voluntary cut from Saudi Arabia since July 2023, and the latest
1.7-MMbopd voluntary reduction announced in November 2023, OPEC+ crude share
was 34.3% in January of this year. The just-announced extension of the
voluntary cuts will bring that share down to 33.9% by June—the lowest share,
ever, for the group.
OPEC+
strategy going forward. The oil supply cuts first announced by
OPEC+ in 2023 are projected to continue to mid-2024. An energy ministry source
told Saudi Press Agency that Riyadh will extend its voluntary cut of 1 MMbopd,
which was implemented in July 2023, until the end of the second quarter of
2024. Afterwards, to support market stability, these additional cut volumes
will be returned gradually, subject to market conditions. And Russian Deputy
Prime Minister Alexander Novak also said, "In order to maintain market
stability, these additional cuts will be gradually restored, depending on
market conditions," after the end of the second quarter.
The
measures for both countries are in addition to a 500,000-bopd reduction
announced in April 2023, which runs until the end of 2024. UAE, Kuwait, Iraq
and Kazakhstan followed suit, saying they would extend existing voluntarily
cuts until the end of June. The OPEC+ oil alliance of 22 nations has implemented
supply cuts of approximately 5 MMbopd since the end of 2022.
Non-OPEC producers reaping benefits. It appears that OPEC+ is doggedly determined to pursue a price-support strategy, at the expense of its market share. This comes in stark contrast to the approach the cartel employed during the 2014-2015 flood event, designed to hurt U.S. shale producers. Despite this latest trend, OPEC’s considerable influence is still intact. OPEC publications state that 80% of the world's proven oil reserves are located in OPEC member countries, with the bulk of OPEC crude reserves in the Middle East, amounting to 67% of the organization's total. However, the sustained output reduction is a major boon for non-OPEC producers that are certainly taking coveted market share from OPEC producers. WO