John Paisie is president of Stratas Advisors, a global research and consulting firm that provides analysis across the oil and gas value chain. He is based in Houston.
The oil market has been stuck in a rut for the last two months with the price of Brent crude bouncing between $70/bbl and $80/bbl. The current price dynamics are the result of ongoing concerns about the global economy, including the two largest economies (the U.S. and China). The concerns about the global economy and the associated oil demand are being reflected by the negative sentiment of the oil traders. At the end of June, the net long positions of traders of WTI fell back to the level last seen on March 21, just prior to the announcement of additional supply cuts on April 2 by OPEC+.
As such, it not surprising that OPEC+ announced on July 3 another round of production cuts, which entail the following:
- Saudi Arabia is extending its voluntary production cut of 1 MMbbl/d through August, with the possibility of the further extensions.
- Russia is planning to decrease its crude oil exports by 500,000 bbl/d in August, which is in addition to the reduction of the 500,000 bbl/d announced by Russia back in March; however, there is limited evidence that Russia moved forward with this initial reduction.
- Algeria chimed in with an announced cut of 20,000 bbl/d during August, which is in addition to the 48,000 bbl/d cut that Algeria made in April.
These additional cuts align with our view that OPEC+ will remain proactive in adjusting supply to align with demand and to place a floor under oil prices. The cuts also align with our view that oil prices will zig and zag on an upward trend during the second half of the year, with oil demand starting to outstrip supply.
There remain, however, downside risks, in part because of the aforementioned uncertainty associated with the global economy. Another potential risk, though with a lower probability, is the breakdown in the cooperation among OPEC+ members. Saudi Arabia is likely reaching its limit with respect to further production cuts with its current production at around 9 MMbbl/d. While Saudi Arabia has previously reduced its production to 8 MMbbl/d to balance the market, those instances were associated with significant downturns in oil demand.
Another factor that could cause instability would be an agreement between the U.S. and Iran that would allow Iran to increase its exports; however, we think that such an agreement is unlikely. The U.S. is seeking an agreement with Iran that would entail the country agreeing to not enrich uranium past 60% in exchange for the U.S. to not tighten sanctions further on Iran.
The proposed agreement, however, does not include the removal of sanctions on Iran’s oil sector. Even if some agreement is reached, the more important development is Iran’s growing ties with Russia (which goes beyond the supply of drones) and China. Consequently, Iran appears to be less motivated in dealing with the U.S. because China and Russia provide an alternative to making concessions to the U.S.
Furthermore, Iran has been able to increase its oil exports since the beginning of the Biden administration. Iran’s oil production is now back to nearly 3 MMbbl/d and exports are running more than 1.5 MMbbl/d (with China being the main destination), which is the highest since 2018, though still well below the 2.5 MMbbl/d before the U.S. put additional sanctions on Iran.
Flows to Europe
Regardless of the short-term uncertainty, the oil market has proven again its resiliency and flexibility while facing disruptions. A vivid example is the shift in oil flows to Europe that have taken place in response to the sanctions on Russia oil-related exports.
In the Atlantic Basin, the U.S. increased its exports to Europe from 1.05 MMbbl/d in 2021 to 1.61 MMbbl/d in 2023 (based on our projections for the rest of 2023) with most of the exports being light and sweet in quality. Brazil also increased its exports to Europe from 160,000 bbl/d in 2021 to 286,000 bbl/d in 2023 with most of the exports being medium and sweet in quality. Other producers, including Saudi Arabia (from 481,000 bbl/d to 878,000 bbl/d) and Iraq (from 666,000 bbl/d to 692,000 bbl/d) increased their exports to Europe. Concurrently, Russia shifted its exports toward Asia—namely India and China.
It is because of this flexibility that oil prices have moderated and the impact of the sanctions on Russia has been muted. To ensure the future security of energy supply, the robustness of associated supply chains will need to be explicitly considered in determining the optimal speed of shifting from oil (and natural gas) to alternative sources of energy—including energy to meet the demand associated with the transportation sector.
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