Imminent shock in oil supply opens debate in OPEC

The specter of an oil supply shock this winter has created a quandary for OPEC and its wider circle of crude producers over whether to reverse course on the production cuts set last month.

Starting in early December, the oil market will face a series of looming problems that some members of the Organization of the Petroleum Exporting Countries see as a potential opportunity. to pump more oil and others see it as a reason to stay the course with their production cuts.

In the past two weeks, OPEC members began informally discussing the possible need for more oil this winter, OPEC delegates said. The initial trigger was data showing rising oil demand in the coming months, a normal seasonal adjustment caused by the burning of fuel oil in Europe and North America, the delegates said.

There were other concerning data points, the delegates said. On December 5, one day after OPEC meets with other producers, including Russia, in Vienna in a meeting known as OPEC+, the European Union is ready to impose an embargo on Russian oil. On the same day, the Group of Seven leading nations is established. set a price cap about Moscow crude. Russian officials have said they will not sell oil to countries that impose a price cap, raising the possibility of a supply gap. if Russian oil does not find buyers.

In addition, there has been disappointing news from the US shale country, where companies did not drill more to take advantage of this year’s high prices. And finally, big OPEC producers such as the United Arab Emirates and Iraq have long chafed over production limits they view as too low, the delegates said.

With all these emerging energy market headwinds, some OPEC+ delegates have begun discussions, including OPEC’s largest member Saudi Arabia, whether to reconsider last month’s engineered production cut of 2 million barrels per day. the delegates said.

The production cut was controversial, as the White House claimed it aligned OPEC+ with Russia’s war effort in Ukraine. The Saudis have said the cut was economically justified, and a growing group of oil market analysts agree with their assessment after crude prices fell below $100 a barrel.

Discussions are still early and OPEC+ could decide to do nothing at its December 4 meeting or even cut more, as Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman suggested in a statement on Monday. Prince Abdulaziz denied that there were discussions of a production increase of 500,000 barrels per day, which The Wall Street Journal had reported was the high end of what delegates were talking about.

OPEC+ delegates said Prince Abdulaziz’s refusal to talks reflected discomfort with public discussion of the group’s decision-making before a deal with Russia was reached. As the two largest OPEC+ producers, the Saudis and the Russians generally rule the group by mutual consent.

the precipitate drop in oil prices What followed the Journal story likely reinforced the view that even a partial reversal of output cuts would be a bad idea, Helima Croft, chief commodity strategist at Canadian broker RBC, said in a note to clients.

Prices fell more than 5% and WTI, the US benchmark index, fell below $80 a barrel for the first time in two months. The market cut those losses after the declarations of Prince Abdulaziz. On Tuesday, Brent crude, the international benchmark, and WTI rose more than 2%.

Ms Croft, who attends OPEC meetings, said OPEC+ was not likely to make any drastic decisions until the EU imposes its oil embargo, when “there is clear information about the size of the supply gap from Russia ”.

“We believe the kingdom will seek to strike a balance between helping Europe with additional barrels and avoiding a sell-off that would jeopardize the recently strengthened balance sheets of OPEC+ producers,” Ms Croft said.

Echoing some OPEC+ delegates, Ms Croft said there was a possibility that OPEC could adjust baseline production levels of some producers, which could lead to an effective production increase.

The UAE is the most prominent example of a producer having OPEC production baselines that are below actual capacity. Its OPEC production baseline is just over 3 million barrels per day, but its capacity is over 4 million barrels per day. The Persian Gulf country denied on Tuesday that it is seeking an OPEC+ production increase, but market participants have long known that it is pushing for OPEC to recognize its increased production capacity and let me pump more.

Production baselines are a sensitive point in OPEC’s contentious internal politics.

Countries like the United Arab Emirates have been spending billions of dollars to build up their capacity in a bid to extract as much oil as possible before a transition to renewable energy occurs around the world. But raising the UAE’s OPEC production baseline would likely mean looking at the baselines for countries like Nigeria and Angola, which have not invested in their infrastructure and are well below their baseline levels. Nigeria and Angola oppose such reviews.

The UAE has consistently pumped in excess of its OPEC-imposed production limit of 3.18 million barrels per day, often reaching 3.5 million barrels per day.

High oil prices have been beneficial to OPEC+, an alliance of oil-producing countries that controls more than half of world production. WSJ’s Shelby Holliday explains what OPEC+ countries are doing with the windfall and why they are unlikely to distance themselves from Russia. Illustration: Adele Morgan

OPEC’s talk of a production increase comes as the oil companies behind the US fracking boom disappointed analysts who had expected US oil production to decline.

Instead, shale drillers kept their output more or less level, following orders from Wall Street to return excess cash to investors through dividends and buybacks or pay down debt, rather than pump money back into the oil sector, as they had done for a decade. Several companies generated record amounts of free cash flow.

US oil production rose less than 3% from December to 11.98 million barrels per day in August, according to the latest monthly data from the Energy Information Administration. The EIA cut its year-end forecast for US oil production by nearly 500,000 barrels a day from its March forecast, and by 770,000 barrels a day by the end of 2023.

—Collin Eaton contributed to this article.

Write to Benoit Faucon at benoit.faucon@wsj.com and Summer Said at summer.said@wsj.com

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