Opec+ supply gap may push oil higher, IEA warns

If the persistent gap between Opec+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices



Opec maintained its outlook for oil demand in 2022 but said there is an “upside potential to the forecast” as global economies continue to recover strongly from the coronavirus pandemic-induced headwinds. — File photo
Opec maintained its outlook for oil demand in 2022 but said there is an “upside potential to the forecast” as global economies continue to recover strongly from the coronavirus pandemic-induced headwinds. — File photo
by

Issac John

Published: Sun 13 Feb 2022, 3:54 PM

A failure by Opec and its allies to meet their output targets will result in persistent price rally, the International Energy Agency warned as it raised its forecast for world oil demand in 2022.

“Chronic under-performance by Opec+ in meeting its output targets and rising geopolitical tensions have propelled oil prices higher,” the IEA said in its monthly oil market report.

If the persistent gap between Opec+ output and its target levels continues, supply tensions will rise, increasing the likelihood of more volatility and upward pressure on prices. Still, the economic shock could be averted if those members of Opec + that possess extra reserves deploy them, the Paris-based agency said.

The UAE and Saudi Arabia are the two oil producers with the most spare production capacity.

On the other hand, Opec maintained its outlook for oil demand in 2022 but said there is an “upside potential to the forecast” as global economies continue to recover strongly from the coronavirus pandemic-induced headwinds. The group maintained its oil demand forecast for this year at 4.2 million barrels per day, unchanged from the previous month’s forecast.

The IEA said those risks of oil supply tensions and more volatility, which will have broad economic implications, could be reduced if producers in the Middle East with spare capacity were to compensate for those running out.

Saudi Arabia holds the bulk of the group’s spare capacity. It has so far resisted the idea of tapping those reserves more quickly, contending that the individual quotas set by the Opec+ agreement should be respected.

Despite the IEA’s warnings, its forecasts still indicate that world oil markets will tip back into surplus for the rest of this year as supplies outside of Opec+ pick up. The agency revised up its forecast for US oil supply growth in 2022 by 240,000 barrels a day to 1.2 million barrels a day.

Oil market experts said major oil producers appear to be in no hurry to increase supply. “What is perhaps more important is governments are increasingly walking back their commitments to an energy transition agreed to at COP26. This is one more example of incompatible trends. The world cannot both use more oil and gas, and produce less.”

The price of West Texas Intermediate (WTI) opened 2022 at about $75 a barrel (bbl). A week ago, the price rose above $90/bbl for the first time since 2014. That was also the last year the price of WTI was above $100/bbl.

Analysts pointed out that in the first half of 2014, oil prices bounced between $100/bbl and $105/bbl. But the shale boom had put millions of new barrels of oil into the markets over the course of several years, and by mid-2014 the market was approaching an oversupply situation. The price of oil started to decline, but then in the second half of the year Opec embarked upon a price war to win back market share that had been lost to the American shale boom.

“The result was that the bottom fell out of the oil market. By the end of 2014, the price had declined to $53/bbl. The price remained depressed for all of 2015, and by early 2016 WTI fell below $30/bbl,” Robert Rapier wrote in Oilprice.com.

“The question now is whether the current situation is more like the first half of 2014, or whether it is more like 2011, when prices rose above $100/bbl and largely stayed there for the next three years. I would argue that we are somewhere in between,” said Rapier.

— issacjohn@khaleejtimes.com


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