US oil producers pose ’emerging threat’ after OPEC + defies calls to speed up production increases

Major oil producers on Thursday refused to speed up plans to gradually increase oil production each month, increasing the potential for the United States to take advantage of commodity prices, which are trading near multi-year highs.

Time will tell if oil prices continue to rise and “whether or not the improvement in the economy will cause companies to reconsider their spending plans which have been constrained by the reluctance of the capital markets towards fuels. fossils, ”said Andy Brogan, world leader in oil and gas professional services. EY network.

If capital begins to flow back into the oil field and the production of non-OPEC countries, including the United States, begins to rise again, the Organization of the Petroleum Exporting Countries and their allies, collectively known as OPEC +, will have to “make a decision on how to react,” said Brogan.

OPEC + reaffirmed its previous decision on production levels in a video conference on Thursday, and said the group would increase overall monthly production by 400,000 barrels per day in December. The group ignored calls from the Biden administration and others to pump more.

At a meeting in early October, OPEC + upheld the agreement reached in July to gradually increase monthly oil production by 400,000 barrels per day from August. The aim of the agreement is to phase out the remaining production cuts implemented last year. The October decision included a 400,000 barrels per day increase in November.

The next OPEC + ministerial meeting is scheduled for December 2.

“Short” on exit targets

The reality, however, is that OPEC “is not meeting the growth of its target offering,” Peter McNally, global head of industrial metals and energy and vice president of Third Bridge, told MarketWatch.

Overall OPEC + production increased by 470,000 barrels per day in September, but the 19 members with production quotas under the OPEC + supply agreement were 570,000 barrels per day below their allocations for this month, according to an S&P Global Platts survey released on October 11. .

S&P Global Platts said that while some OPEC + members have “large” production capacity available, such as Saudi Arabia, Russia and Iraq, several other countries are facing significant operational disruptions, many of which are due to damaged infrastructure.

Still, Ann-Louise Hittle, vice president, macro-oils, at Wood Mackenzie, said OPEC oil production has already risen sharply this year, to 27 million barrels per day in the third quarter, from a average of 25 million barrels per day in the first shift.

“These volumes have helped the market stay relatively balanced until this quarter, when we see an implied seasonal pull in stocks,” she said in a media comment.

And as it “becomes clearer that the world is going to survive the winter with enough oil to meet demand, we expect prices to drop from recent highs of $ 87 to $ 85 a barrel for the Brent, ”Hittle said. “This process may already be underway.”

Oil prices traded volatile on Thursday following the OPEC + decision, but stabilized at their lowest levels since early October. January Brent gross BRNF22,
+ 0.34%

+ 0.34%,
the global benchmark, set at $ 80.54 per barrel, down $ 1.45, or 1.8%, on the ICE Futures Europe exchange. American reference oil West Texas Intermediate CLZ21,

fell $ 2.05, or 2.5%, to $ 78.81 a barrel on the New York Mercantile Exchange.

On October 26, Brent came in at $ 86.40, the first month’s high end of contract since October 2018, while WTI closed at $ 84.65, the highest since October 2014.

The United States is an “emerging threat”

McNally pointed out that there has been a “lack of response” from US producers, even as “current trends in demand recovery and major producers imply that crude inventories will continue to be reduced on the market. an absolute basis “.

The level of production in the lower 48 U.S. states is still 1.5 million barrels per day below the pre-COVID peak, McNally said. “The recovery in drilling activity remains anemic as US producers spend more cash for shareholders in the form of dividends and share buybacks than reinvesting in drilling oil wells for new production,” did he declare.

However, Third Bridge expects to see an “emerging threat on the horizon” if US producers choose to push drilling activity higher, he said. This would help ease the tight global supplies that have led to multi-year oil price highs, and potentially take market share away from OPEC +.

President Joe Biden blamed Russia and OPEC for rising gasoline prices in the United States and called on OPEC + to pump more oil.

Read: Why consumers will pay much more for natural gas this winter

Biden failed to get OPEC to ramp up production sooner, but “will he turn to stimulating domestic producers, despite his administration’s environmental priorities?” said Rob Haworth, senior vice president of US Bank Wealth Management.

The United States and other countries may also choose to release oil from strategic oil reserves to make up for any supply shortfall.

“China has already responded to high commodity prices by releasing volumes of strategic oil reserves, and the United States is discussing a similar maneuver,” said Louise Dickson, senior oil markets analyst at Rystad Energy, in a note Thursday.

Weekly closing stocks of crude oil in the U.S. SPR edged down to about 612.5 million barrels for the week ended October 29, compared to 638.1 million barrels for the week ended January 1, according to data from the Energy Information Administration.

Haworth said that for now, oil market supplies are expected to “remain below par, maintaining the highest price support since 2014”. A return to the US office over the next few months should also “build the demand side of the equation, providing additional price support, despite the increase in supply.”

U.S. gasoline prices will remain above $ 3 per gallon

The OPEC + move is not surprising and will prevent oil prices from falling, said Patrick De Haan, head of oil analysis at GasBuddy.

If OPEC + had decided on a larger increase, it probably would have led to “a slight drop in prices at the pump here in the United States, over time,” he said.

But really, the only chance the United States has to see gasoline prices go down is “time,” De Haan said. The monthly increases in OPEC + will help, but “an improvement in the energy crisis abroad, mainly in China and Europe, would offer better changes for lower prices.”

On Thursday, the average price of regular gasoline in the United States was $ 3,406 per gallon, according to GasBuddy.

Read: This city recorded the highest average gasoline price on record in the United States

“Even under the best possible scenarios for motorists, I see little chance that the national average will drop below $ 3 a gallon this year,” De Haan said.

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