- Both OPEC and U.S. shale producers maintain a cautious approach toward production growth.
- OPEC+’ very limited spare capacity could further create upward risk for oil
- Sanctions on Russia are unlikely to be dropped in the short term.
Crude oil has been on a decline over the past few weeks as growing worry about a looming global recession weighs it down. But oil is not going as far down as drivers across the world would like it to go—or as far as politicians up for reelection would like it to go. Barring a dramatic event of demand destruction, oil is going to remain expensive for the observable future.
OPEC and its precious spare capacity
The oil-producing cartel has repeatedly signaled that it is in no rush to deploy its spare capacity to boost global supply and bring down prices. One reason for this is the prices themselves: Saudi Arabia has been raising its oil prices for Asian buyers for several months in a row now because it can. The other reason is that spare capacity is limited.
Earlier this week, when it released its latest Monthly Oil Market Report, OPEC warned that global oil demand is set to rise to levels that would test its production capacity. Known as the “call on OPEC crude,” the amount of oil that the cartel needs to produce in order to cover global demand could rise to 32 million barrels daily in 2023, OPEC said. That would be up from 28.7 million bpd as of this June, which means OPEC would need to boost its production by over 3 million bpd within the next year and a half to cover demand, coming mostly from China and India. And it may not have the spare capacity to do it. Indeed, Reuters earlier this year cited analysts warning that this spare capacity could slip below 1 million bpd by the end of 2022.
Not everyone agrees with OPEC’s demand forecast, of course. Energy Aspects, for instance, sees oil demand in 2023 at 101.8 million barrels daily, quite far below OPEC’s 103 million barrels daily. But even with demand at 101.8 million bpd, Energy Aspects’ Amrita Sen told the FT, “The market is incredibly tight and we do not think Opec have the capacity to deliver that.”
U.S. shale continues cautiously
While analysts discuss OPEC’s spare production capacity, in the United States, shale drillers continue their cautious approach to production growth amid continued calls from the White House to do just that. Since these calls have notably included a caveat that the energy transition remains priority number one, the industry has been in no rush to respond.
According to the latest EIA Weekly Petroleum Status Report, total oil production in the week to July 15 averaged an estimated 11.9 million bpd, which was a decline of 100,000 bpd from the previous week. It was, however, an increase from a year ago, when production averaged 11.4 million bpd. The four-week average until July 15 was 12.025 million bpd.
This is quite a solid increase on the year but not a solid enough increase against the background of demand. The White House has accused the industry of profiteering from high oil prices in a tight supply environment. The industry has countered that it is suffering various challenges, such as material and equipment shortages, and inflation has not been a stranger to the oil industry, either.
Frac sand prices, for instance, had soared by 185 percent over the 12 months to March this year to some $40-$45 per ton. Steel prices have risen, too, and so have wages for oilfield workers amid a labor shortage. As a result, many shale drillers have turned to re-fracs to boost production.
Re-fracs, as the name suggests, refers to secondary fracking of an existing well to suck out the remaining crude at a much lower cost than drilling a new well. This counters accusations of profiteering, but it doesn’t help boost production faster.
Investor pressure remains
Meanwhile, pressure from investors remains substantial on the public players in the U.S. oil field and not just there. Big Oil is a special target for investor pressure. And it’s not just pressure to keep returning cash after years of burning it while pumping as much as possible until prices crashed. It’s pressure to signal more climate-related responsibility.
Shale drillers need to make more ambitious climate commitments, investment firm Kimmeridge Energy Investments said this week, as quoted by Bloomberg. In a white paper, the firm argued that the U.S. shale oil industry should seek to bring its net carbon footprint to zero by 2030. It should also provide consistent data in this respect to make it easier for investors to pick the best companies to invest in.
“We have a carbon problem, not an oil and gas problem,” Ben Dell, co-founder and managing partner of Kimmeridge, told Bloomberg in an interview. “If we can get our oil and gas product to have no carbon footprint on a net basis, and debate how you measure it and the merits, then there’s no reason we shouldn’t use it.”
Between OPEC’s shrinking production capacity, the U.S. shale labor shortage, and investors’ insistence on emission reporting and net-zero commitments, it’s not hard to see where oil prices are going, even if sanctions against Russia suddenly drop, which is not happening, even if the war in Ukraine ends, as multiple EU officials have said.