Kirill Krasilnikov – As the global energy market started showing signs of recovery from the most devastating crisis caused by the pandemic-induced drop in demand, OPEC+ continues to gradually increase oil production despite growing concerns over the new Omicron variant and US-led efforts to rein prices in amid soaring gas prices triggered by a supply crisis.
Following the tumultuous 2020, which saw a steep downfall in oil prices as worldwide lockdowns slowed down the global economy, 2021 saw oil prices rising again, supported by countries reopening their economies amid a worldwide vaccination drive. The global oil demand was expected to grow by over 5.7 million barrels a day (mbd) in 2021, according to the OPEC estimates, while the International Energy Agency (IEA) predicted a 5.4 mbd increase that same year and a 3.3 mbd increase in 2022, which would bring the demand to the pre-pandemic level of 99.5 mbd.
OPEC+ TRUDGES ALONG WITH SLOW PRODUCTION INCREASES DESPITE OMICRON
In 2021, OPEC+ started a new trend of moderate monthly increases in output, which were carried out mostly without objections, with the exception of a summer rift between two traditional allies, Saudi Arabia and the United Arab Emirates. The source of fracture was the UAE’s dissatisfaction with its baseline for limiting oil production — the baseline output for all participating countries was the October 2018 level, while for Russia and Saudi Arabia it was 11 mbd. With Riyadh and Moscow conducting informal negotiations with other OPEC+ members, the new arrangement was reached. Meanwhile, the baselines that are used to calculate the output reduction will be readjusted effective May 1, 2022.
OPEC+ keeping up its production increase policy demonstrates that concerns about the Omicron strain are exaggerated as both the global economy and the global oil market are strong enough to withstand its consequences, according to Mamdouh Salameh, an international oil economist and visiting professor of energy economics at the ESCP Europe Business School in London.
“The fact that OPEC+, the most influential player in the global oil market, has gone ahead with its agreed increase in its crude oil production is a vote of confidence in the market and an admission that the organization strongly believes that any adverse impacts from the Omicron on the market will be mild and containable,” Salameh told Sputnik.
The expert noted that re-introduced lockdowns would lower oil prices, but it would also be followed by a subsequent huge rebound once the lockdowns were lifted. He also cited medical data from South Africa, showing that the new variant is much less dangerous than the previous Delta variant.
“This data should calm down jittery governments and markets and signal that the impact of Omicron will be short-lived and therefore its impact will be muted in 2022. This means that oil prices will recoup all their previous losses and resume their surge, which could take Brent crude towards $80-$85 a barrel during the first quarter of 2022,” Salameh predicted.
WASHINGTON THROWS DOWN GAUNTLET TO OPEC+
The slow pace of the cartel’s production recovery has been viewed as inadequate by the United States, which has been trying to convince the oil cartel and its non-member allies to lower prices for consumers. This is an important issue for the administration of US President Joe Biden. Higher energy prices carry the additional inflationary pressure, which the White House is trying to curb ahead of the 2022 midterm elections, a de facto referendum on Biden’s first two years in office.
Washington has gone as far as to order the release of 50 million barrels of oil from the Strategic Petroleum Reserve in concert with other energy-consuming nations, including China, India, Japan, South Korea and the United Kingdom, in response to the oil prices hitting their seven-year highs in October. The measure has had little effect so far, both on the oil market and the attitude of OPEC+, which upheld its scheduled increase of 400,000 barrels per day on December 2.
The OPEC+ is expected to discuss the oil cuts deal again and make a decision on the monthly additional cuts on January 4.
US SHALE OIL REBOUNDS
The US shale oil industry was battered by the 2020 economic slump and accompanying drop in oil prices. As the US oil sector is privately owned and highly fragmented with companies of different sizes operating in the market, it is less capable of formulating a unified response to the crisis, similar to that of OPEC+, with its mainly state-owned oil industries.
Nevertheless, the sector saw some improvement this year, with research company Rystad Energy estimating that the US shale production is poised to return to pre-pandemic levels of 8.68 mbd in December. Moreover, the sector is estimated to surpass both deepwater and offshore shelf supply in free cash flow (FCF) in 2021 and become the driver for the world’s public exploration and production companies having the highest combined FCF since 2008. Rystad Energy projects it to reach a record $348 billion.
Meanwhile, Biden administration has been actively signalling its pro-evironment agenda, which is shown most vividly in its Build Back Better bill, which was passed in November by the House of Representatives and is expected to get a vote in the Senate in early 2022. The bill includes a ban on new offshore oil drilling, as well as fees on methane gas emissions. According to oil industry advocates, these provisions, along with others in the bill, will cripple the country’s energy production and make the consumer bear the brunt of rising gas prices.
While the fate of the bill is unclear due to the opposition of the moderate Democrat senator from West Virginia, Joe Manchin, which effectively dooms the legislation, it still showcases Democrats’ priorities with regards to the country’s energy sector.
At the moment, the mid-term outlook for the US oil production seems to be improving as the country is predicted by the IEA to reach its highest annual production levels next year, along with Canada and Brazil, bringing the non-OPEC+ supply to 1.8 mbd.
SUPPLY CRISIS DRIVES GAS PRICES UP
Taking a page out of the global oil market’s book, gas prices have been surging across the world as demand outpaces supply amid an economic recovery after months of COVID-19 restrictions. This is consistent with the April predictions by the IEA that the gas demand would increase by 3.2% in 2021, not only recovering from the 2020 losses but actually exceeding the 2019 levels by 1.3%.
The situation has been especially dire in Europe, which has been struggling to fill its gas reserves. The European Commission proposed forming a mechanism that allows the EU countries to carry out joint voluntary purchases of natural gas to fill storage facilities. In December, the European Commission introduced a set of versatile proposals, which included improving the resilience of the bloc’s gas system, facilitating a more strategic approach to gas storage and allowing the member states to carry out joint voluntary purchases of natural gas to fill storage facilities.
One of the reasons the EU finds itself in such position is because of its policy of purchasing gas at spot markets, which are prone to volatility compared to long-term contracts. The situation forces Europe to overpay any time the prices rise. This was highlighted by Russian President Vladimir Putin during his annual press conference. The Russian president also suggested that Germany was reverse-pumping Russian gas to Ukraine through Poland, saying that abandoning this practice would influence the spot market price.
“A harsh winter could push gas and power prices which are already near record levels higher still in the first half of 2022. This could be due to the fact that European gas storage levels are low, nuclear outages in France, very strong demand for both gas and LNG in the Asia-pacific region and tighter global gas market,” Salameh predicted.
The expert went on to say that gas prices in Europe and Asia will remain higher than pre-crisis levels even after the winter season.
IS NORD STREAM 2 PROJECT TO GO SOUTH?
The Nord Stream 2 gas pipeline has been a source of controversy between Russia, Germany and the United States since its inception, with Washington actively trying to discourage all involved parties from implementing the project. However, in July, the US and Germany struck a deal that implied the completion of the Nord Stream 2 pipeline without the threat of US sanctions.
The pipeline’s construction was finally concluded in September and still has to pass through the certification in Germany, which has been temporarily put on hold as Germany’s Federal Network Agency suspended the certification process last month in November, saying it has yet to receive all the necessary documents.
Another challenge to the project emerged with the recent political turnover that resulted in Greens leader Annalena Baerbock, known for being a Russia hawk and her opposition to the pipeline on both environmental and political grounds, becoming the foreign minister.
Despite that only Russia could satisfy the energy demand of the EU countries, but without early certification, Moscow is unlikely to ship additional gas supplies, according to Salameh.
“Therefore, a quid pro quo of additional gas supplies to the EU in return for an early certification of Nord Stream 2 begins to emerge. If not, the Europeans will shiver this winter,” the expert warns.