The OPEC+ Joint Technical Committee cut its outlook for oil supply surpluses in 2022 in half and forecasts a deficit of 300 000 barrels per day (BPD) in 2023.
OPEC+ is scheduled to meet on Monday, and Saudi Arabia has suggested that the group begin to consider potential production cuts to stabilize oil markets.
The oil price has been extremely volatile since coming off its peak at the start of June, with some market moves even seeming irrational or fuelled purely by rumours at times.
The price of Brent Crude fell by more than 9% since Tuesday. Due to low liquidity caused by the lowest level of open futures contracts since 2015, there has been an increasing divergence between paper markets and the physical demand and supply dynamics.
Saudi Arabia’s Energy Minister, Prince Abdulaziz bin Salman, supported this view, saying spare capacity is severely limited.
The latest data from the US Energy Information Administration showed that US oil demand in June was back to pre-Covid levels and close to its highest levels historically. The demand came in at 20.772 million BPD.
This data contradicts beliefs among many market participants that there is demand destruction due to raised interest rates and economic slowdowns across the world.
The chart below shows the US oil demand over the last decade.
Biggest oil producers in the world
The United States is the world’s largest oil producer by a significant margin, but it is also the world’s largest consumer and a net importer of oil.
In 2021, the USA imported 1.15 billion barrels of oil. President Biden has undertaken in April to release 1 million barrels per day from their Strategic Petroleum Reserve, while the 30 other member nations of the International Energy Agency will match it.
That would equate to the same volume that is produced by Norway, the eleventh biggest oil producer.
However, it is unlikely to make a significant difference and cannot be kept up forever. It is also not prudent to deplete strategic oil reserves during a time with a higher risk of conflict.
With Russia out of the mix, Saudi Arabia is by far the biggest exporter of oil, even though Russian oil likely still finds its way into markets.
OPEC countries contribute 35% of all oil production.
Joe Biden has tried his best to make Iran’s production available to them through the revival of the nuclear deal.
However, this will likely push Saudi Arabia to cut production sooner. Iran would also need more than a year to ramp up production to its full capacity.
Libya recently saw a huge jump in production after recovering from the unrest in their country, while Iraq experienced violent clashes around Baghdad on Monday. Their oil production remained unharmed for now.
It is believed that only Saudi Arabia and the United Arab Emirates have spare capacity that can impact markets in any meaningful way.
It would mean that Saudi Arabia can control the oil price to a large extent in the medium term if they can withstand the political pressure from the US.
|World’s Top Oil Producers
|Oil Production (BPD)
|% of Total
|United Arab Emirates