OPEC Predicts Higher Oil, Despite Russian Price Cuts

OPEC’s latest report issued last month indicates the cartel expects oil prices to rise significantly this summer as demand from China accelerates.

In its summer oil market outlook, OPEC said global demand will likely rise 2.5% in this year's second and third quarters compared with the same periods a year ago.

That's up from an estimated 2.1% year-to-year increase in this year's first quarter, when OPEC estimated global demand averaged 101.6 million barrels a day. By the third quarter, OPEC estimates that figure will increase by another 480,000 barrels a day, surpassing 102 million.

"Heightened mobility in the upcoming driving season in the U.S. is expected to provide the usual additional demand for transportation fuels," OPEC said. "However, any weakening in the economy on the back of ongoing monetary tightening measures by the Federal Reserve may offset some of this seasonal dynamic."

Chinese Demand

Despite increased demand, OPEC announced further production cuts of 1.16 million barrels per day. The announcement gave little information on the reasons for the surprise cuts, saying they were a "precautionary measure" to support market stability. Some OPEC delegates told Reuters they did not know the exact reasons for the reduction.

"The market currently underestimates the impact of production cuts, which will lead to a significant supply deficit in H223," said Carsten Fritsch, senior commodity analyst at Commerzbank.

OPEC’s statements have been contradictory though. Earlier this year, representatives said a rebound in China's economy after the easing of pandemic restrictions and solid demand throughout the Middle East and Asia should help feed this summer's increased oil needs.

And Beijing is increasingly seeking alternatives in the global oil market, including expanding its drilling at home and signing deals with foreign countries including Brazil, Qatar and Afghanistan.

"It should be noted that potential challenges to global economic development include high inflation, monetary tightening, stability of financial markets and high sovereign, corporate and private debt levels," OPEC said.

China’s domestic oil companies produced 18.2 million tons of crude in March, the highest level since December 2014, according to the National Bureau of Statistics. Also in March, Cnooc Ltd., one of the largest state-owned oil majors, said it discovered an oil field in the Bohai Sea, in the country’s northeast, that would add a hundred million tons of reserves to China’s oil supply.

Russian Exports

Late last year, Russia surpassed Saudi Arabia to become China’s largest oil trading partner. It accounted for 18.4% of China’s crude imports in March—and Saudi Arabia made up 17%—according to Chinese customs data.

China’s strategic petroleum reserves are part of this push for greater energy security. The country topped up its reserves during the middle of the Covid-19 lockdown when oil prices were low.

The move takes advantage of Russia's attempts to offload stock to Asia after banning sales of domestic oil to countries that imposed price caps following escalations in the conflict in Ukraine. The cap bars the shipping, financing or insuring of Russia’s seaborne crude unless it is sold for $60 a barrel or less.

Since late November, Russia has been selling its flagship Urals crude for as much as $17 less than the cap, according to the International Energy Agency. And despite volatile demand for its oil on global markets, Russian oil companies have continued to accelerate production.

In the first quarter of 2023, Russian oil majors placed 2001 new oil wells into production, a 10% increase from last year. But Russian Deputy Prime Minister Alexander Novak said last week that Russian oil and gas condensate production is expected to decline to around 515 million tonnes (10.3 million bpd) this year from 535 million tonnes in 2022, thanks to OPEC’s voluntary cuts.

US Resilience

"Taking all the public leasing and permitting off the table was the dumbest thing that this administration has done as far as energy goes. They knew better," Continental Resources Executive Chairman and founder Harold Hamm said last month.

Thanks to the Biden Administrations threats to stop issuing new oil and gas exploration permits, energy majors stockpiled permits for future drilling in 2019. Energy consultancy Rystad said it saw stockpiling of federal lands drilling permits in the run-up to the presidential election, with federal permit requests rising to a 31% share of all permit requests in the major U.S. oil fields from 18% in 2019. There are 9,173 approved but unused drilling permits on federal and tribal lands.

Since taking office, Biden has authorized the release of about 260 million barrels of oil from the SPR. That includes a 180 million barrel release spread over six months in 2022 which was the largest-ever drawdown of the SPR. Biden's drawdowns have left the SPR with about 371.5 million barrels as of early January 2023, which is the lowest level of SPR reserves since December 1983 according to data from the Energy Information Administration (EIA).

And now, instead of refilling the SPR, the Biden administration announced it is indefinitely blocking 16 million acres of federal land and water in Alaska from future fossil fuel drilling.

"With these actions, President Biden continues to deliver on the most aggressive climate agenda in American history," the Department of Interior said in a statement. "He has made the United States a magnet for clean energy manufacturing and jobs. He secured record investments in climate resilience and environmental justice."

But that hasn’t stopped oil majors from expanding capacity at existing refineries.

Last year, Exxon nearly doubled their refining capacity at the Beaumont complex in the Permian Basin. After beginning construction in 2019, the Beaumont refinery broke ground in March and added 250,000 barrels per day to its oil output, increasing its total processing capacity to more than 630,000 barrels daily.

Overseas, the Biden Administration has continued its theft of Syrian oil in occupied regions. According to an August investigation by The Cradle and reports from the Syrian Ministry of Foreign Affairs, losses incurred by the country’s oil and gas sector due to Washington’s occupation of Kurdish territory amounted to $107 billion since 2011.