OPEC and U.S. shale producers are apprehensive about expansion.
Both OPEC and U.S. shale producers are careful about how much they increase production. Oil prices could go up even more if OPEC+ has very little spare capacity. Sanctions against Russia are not likely to be lifted soon.
In the past few weeks, the price of crude oil has been going down because more and more people are worried about a coming global recession. But oil isn’t going down as much as drivers around the world or politicians who are running for office would like it to. Unless something big happens that kills demand, oil will stay expensive for as long as we can see.
OPEC and the valuable spare capacity it has
The oil-producing cartel has made it clear more than once that it is not in a hurry to use its spare capacity to increase global supply and lower prices. One reason for this is the prices: Saudi Arabia has been raising oil prices for Asian buyers for several months in a row because it can. The other reason is that there isn’t much extra space.
When it released its latest Monthly Oil Market Report earlier this week, OPEC warned that the world’s demand for oil is going to rise to a level that will test its ability to meet that demand. OPEC said that the amount of oil the cartel needs to make to meet global demand could rise to 32 million barrels per day in 2023. This is called the “call on OPEC crude.” That’s up from 28.7 million bpd in June, so OPEC would need to increase production by more than 3 million bpd in the next year and a half to meet demand, which is mostly coming from China and India. And it might not have enough extra power to do it. In fact, analysts told Reuters earlier this year that this spare capacity could fall below 1 million barrels per day by the end of 2022.
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Of course, not everyone agrees with OPEC’s prediction of oil demand. Energy Aspects, for example, thinks that oil demand will be 101.8 million barrels per day in 2023, which is quite a bit less than OPEC’s estimate of 103 million barrels per day. But even though demand is 101.8 million bpd, Amrita Sen of Energy Aspects told the FT, “The market is very tight, and we don’t think Opec can meet that.”
Shale continues cautiously in the U.S.
Analysts talk about OPEC’s spare production capacity, while in the US, shale drillers continue to grow production slowly even though the White House keeps telling them to do so. Since these calls have made it clear that the energy transition is still the most important thing, the industry hasn’t been in a hurry to answer.
According to the most recent EIA Weekly Petroleum Status Report, oil production averaged about 11.9 million barrels per day (bpd) in the week ending July 15. This was 100,000 bpd less than the week before. It was, however, more than the average of 11.4 million bpd that was made a year ago. Up until July 15, the average for the four weeks was 12.025 million bpd.
This is a pretty big jump from last year, but it’s not a big enough jump to keep up with demand. The White House has said that the industry is trying to make money off of high oil prices when supplies are low. The oil industry has said that it is facing a number of problems, such as a lack of materials and equipment, and that inflation is also a problem for it.
For example, the price of frac sand rose by 185 percent in the year leading up to March of this year, reaching $40-$45 per tonne. Even though there aren’t as many people to work in the oil fields, prices for steel and wages for oilfield workers have both gone up. Because of this, a lot of shale drillers are using re-fracs to increase production.
Re-fracs, as the name suggests, is a second fracking of an existing well to get the rest of the oil out. This is much cheaper than drilling a new well. This stops people from saying you’re out to make money, but it doesn’t speed up production.
Investor pressure remains
Still, investors keep putting a lot of pressure on the public players in the U.S. oil field and elsewhere. Investors put a lot of pressure on Big Oil. And it’s not just pressure to keep giving back cash after years of burning it while pumping as much as possible until prices crashed. There is pressure to show more responsibility for the climate.
This week, the investment firm Kimmeridge Energy Investments was quoted by Bloomberg as saying that shale drillers need to make more ambitious climate commitments. In a white paper, the company said that the U.S. shale oil industry should try to get its net carbon footprint to zero by 2030. It should also give investors consistent information about this to help them choose the best companies to invest in.
Ben Dell, co-founder and managing partner of Kimmeridge, told Bloomberg in an interview, “We have a carbon problem, not an oil and gas problem.” “There’s no reason why we shouldn’t use oil and gas if we can get them to have no net carbon footprint, and we can argue about how to measure it and how good they are.”
Between OPEC’s shrinking production capacity, the lack of workers in the U.S. shale industry, 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 going to happen, even if the war in Ukraine ends, as multiple EU officials have said.