According to the latest OPEC Monthly Oil Market Report, oil demand this year will register a healthy 3.1 million bpd, although the forecast for the second half of the year has been revised downwards due to “expectations of a resurgence of COVID-19 restrictions and ongoing geopolitical uncertainties.” These geopolitical uncertainties are a well-intentioned euphemism for the war in Ukraine. More interestingly, however, OPEC also estimated the difference between global oil demand for the current quarter and non-OPEC production at 28.27 million bpd, which OPEC itself would have to produce to sustain the market in balance. This is not an open declaration of production cuts. It is a simple ab calculation at the end of a table detailing global oil demand and supply. However, it suggests that a reversal of OPEC production policies may be on the way, ZeroHedge suggested in an article published on Thursday. Most of OPEC has already – and continues to – underperform its production targets. The cartel and its partners led by Russia promised to boost output by more than 600,000 bpd in July and August, up from about 420,000 bpd originally agreed. However, they fell short of that target in July and will likely fall short again this month. Then, on top of that, OPEC+ agreed at its last meeting earlier this month to add a modest 100,000 bpd to total output. Traders were surprised by the addition, and some saw it as a direct slap in the face to Biden after the US president traveled to the Middle East to personally ask Riyadh for more oil. Speaking for Riyadh, the crown prince, who effectively runs the Kingdom, made it clear that he would not deploy the country’s reserve oil production capacity unless the global oil supply situation becomes critical. He used phrases such as “severely limited availability” of spare capacity, although unnamed sources Reuters spoke to said both Saudi Arabia and the United Arab Emirates could pump “significantly more” oil if the need arose. The question now is whether OPEC sees this as a necessity. This latest downward revision to demand was the cartel’s third since April. The IOC, meanwhile, appears to have realized that the impact of Western sanctions on Russian oil production and exports has been far less severe than expected. And that sets the stage for an oil market that is better stocked than many would have expected just a few months ago. Of course, it would be imprudent to ignore demand destruction from high prices as a factor in the overall decline in oil demand. But the demand disaster, such as it is, is being balanced by an increase in gas-to-oil switching, particularly in Europe, as utilities and governments struggle with record gas prices. This week, a US Mars crude oil tanker arrived in Germany, the first shipment of such crude oil to that country. The reason: the upcoming Russian oil embargo and the need to urgently find alternatives to Russian crude, especially with the tight gas supply situation worsening by the day. The shift from natural gas to oil, which could well accelerate as the warming season approaches, could well become a major source of oil demand in the near term. There are other reasons to be bullish, too: Reuters reported earlier this week that US refiners and pipeline operators expected strong demand for their product in the second half of the year, despite high prices. If demand proves healthy and strong, then OPEC will not need to take action to support prices. Brent crude oil, at the time of this writing, was just a dollar below $100 a barrel and West Texas Intermediate was over $93 a barrel. This Brent price should be good for OPEC. If it falls, though, things can change very quickly. The chances of that happening seem remote, at least according to Damien Courvalin of Goldman Sachs. In a new forecast, Courvalin said the bank’s analysts expected oil prices to fall to $130 a barrel by the end of the year. “We are still in deficit. Despite the slowdown in growth, prices still have work to do, and that’s higher from here,” he told Bloomberg. It is always remarkable when OPEC sees a surplus in the market where others see a deficit. It usually means that the cartel can prepare for lower output in anticipation of price levels that are inconsistent with its expectations. Of course, OPEC is well aware of the fine line between doing too little and too much on prices and killing demand, so it’s unlikely the cartel will be ready to start cutting output anytime soon. For now, it is enough that OPEC has made it clear that spare capacity is limited and most members cannot produce at their quota. After all, there’s only so much a cartel can do. By Irina Slav from Oilprice.com More top reads from Oilprice.com:
