March 27, 2023

OPEC+ is ignoring short-term volatility and eyeing the medium term

OPEC+ members remain committed to keeping output quotas unchanged until the end of this year, with the group expected to gradually take back market share over time as non-OPEC sources of supply run out of steam.

Crude prices continue to remain volatile as geopolitical and economic uncertainties continue to shape crude markets. Whilst these short-term factors may be impacting the profitability of OPEC members, with fiscal-breakeven oil prices for several producers remaining above current price levels, the group remains committed to balancing crude markets, adhering to current targets, and are expected to gradually take back market share over time.  

Even though OPEC+ supply is set to retain its current market share over the coming years, we estimate that OPEC members (including nations currently not part of the agreement) are expected to see its total share rise from an average of around 37% seen over Q1 of this year, to 38% by 2025. This assumption is corroborated by the fact that recent upstream activity has remained strong for many OPEC producers, with the group’s oil rig count recording the second-largest monthly increase post-pandemic in February (BGHE). Much of this upside can be attributed to Iraq and Kuwait, with activity in Nigeria remaining unchanged and at a post-pandemic high of 13 rigs as well.  

This is coming at a time when many members are also expected to bring online additional capacity over the coming years. The most noteworthy example is the UAE, which announced late last year that it aims to ramp up its production capacity to 5 Mbd by 2027, which is equivalent to an increase of around 1.7 Mbd vs current production levels. This marks an acceleration compared to its previous estimate of 2030 and is a result of rising oil reserves and growing fears of limited global spare capacity.  

International oil rig count y/y change, count

Source: BGHE, Kpler

The latter assumption has been raised on multiple occasions by Saudi Aramco’s CEO over the past year, and is a view shared by us as well, with US shale supply, a price-sensitive producing region and the largest source of non-OPEC supply, coming increasingly under pressure as of late. Whilst rising costs, staff and equipment shortages and stronger shareholder demands have arguably been the largest factors holding back US shale supply last year, we expect inflationary pressures and lower commodity prices to keep output growth constrained in 2023. In fact, should WTI remain below $70/bbl over the next months, we estimate that capital expenditure from US producers will ease by around 20%, which could result in significant downwards revision to our current supply forecast for the country for Q4 and beyond. This comes as activity across the country’s shale patch has already slowed down significantly over the last year and remains on pace to reach peak supply over H2-2024.  

Other OPEC members have remained ambitious as well, with Nigeria’s state-owned oil firm NNPC announcing that it aims to produce 2.2 Mbd by year-end, which is up from current production levels of around 1.5 Mbd. Whilst the country has managed to fight oil theft and bring back a significant amount of crude so far this year, we remain less optimistic in Nigeria reaching their goals and see output leveling out around current levels over the remainder of the year. Nevertheless, these goals highlight OPEC’s goals of supplying markets and regaining market share over time, with Iraq recently also signing six new oil and gas contracts in February, which have been postponed on numerous occasions since 2018, but have the potential to produce some 250 kbd once development is completed. This view is further strengthened by recent remarks made by Iraq’s oil ministers, who announced that the country remains aligned with OPEC goals but is ready to ramp up domestic production if OPEC+ gives the go-ahead, although we estimate current upside potential for Iraqi crude supply to remain limited at the time of writing.

In terms of our balances, we see a similar picture emerging, with crude markets becoming increasingly tight and reaching a deficit of 3 Mbd towards the middle of the year. It is why we believe that no OPEC+ management is needed at this time, and crude prices should level out and return to an $80-90/bbl range over H2. Whilst a number of headwinds remain, the outlook for OPEC members remains rather optimistic, with tight balances supporting crude prices from mid-2023 onwards and supply constraints likely to keep markets supported into next year as well.  

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