Two major reasons hinder OPEC+ from increasing production, and oil prices may continue to rise

On October 4, OPEC+ proposed to increase production by 400,000 barrels per day as originally planned, without additional production. The news stimulated Bursa oil to rise above US$81. Petroleum analyst Irina Slav wrote an article that analyzed the two main reasons OPEC+ refused to further increase production: some OPEC+ members have limited capacity to increase production, and the oil industry is facing the dilemma of insufficient investment.

OPEC+ maintains its monthly production increase plan of 400,000 barrels per day unchanged, and the oil price rises above US$81

On October 4, local time, the 21st OPEC+ Ministerial Meeting was held online. In view of the current oil market situation and consensus on its prospects, the parties reconfirmed the production adjustment plan and monthly production adjustment mechanism approved by the meeting, and decided to increase total production by 400,000 barrels per day in November 2021.

Because OPEC+ refused to increase its daily output by more than 400,000 barrels, the oil distribution soared above US$81. There are concerns in the market that OPEC+ may not actually be able to increase production further. Although Saudi Arabia and the UAE have recently increased production, other OPEC members have seen their production decline this year.

Within a month, the price of Bilbao oil went from around US$72 per barrel to around US$80 per barrel because the shortage of natural gas has stimulated greater demand for oil. The price of natural gas is so high that oil has become a cheaper alternative to power generation. Coal demand has also soared to sky-high prices, even in Europe, because utility companies struggle to find raw materials to maintain electricity supply. OPEC is again required to increase supply to the market.

The main appeal for OPEC to increase supply comes from the United States. Despite rising oil prices, US shale oil producers still maintain strict drilling disciplines, focusing on shareholder returns rather than production growth. This has allowed U.S. oil production to maintain relatively modest growth, even when oil prices are rising. In addition, Hurricane Ida destroyed an estimated 30 million barrels of production, and the Biden administration turned to OPEC+ to increase production.

Two reasons why OPEC+ is unwilling to increase production

However, OPEC+ did not respond to the U.S. request to increase oil demand, insisting on an increase of only 400,000 barrels per day. Petroleum analyst Irina Slav concluded that this is mainly for two reasons:

①There are differences in the export capacity of OPEC+ member countries<br>Last month, Vortexa reported that there are considerable differences in the export capacity of different OPEC+ member countries. Although Saudi Arabia and the UAE increased their exports by about 1.9 million barrels per day in the three months to September, exports from all other oil-producing countries in the group have declined since the beginning of the year.

The difference between oil production and supply is often overlooked. Supply can remain higher than output for a period of time, thereby reducing the relevance of productivity. However, relevant data shows that most OPEC+ members lack the means to increase production and thus supply.

②Insufficient investment in the petroleum industry

OPEC Secretary General Mohamed Barkindo said last week that it is no coincidence that the world cannot afford the consequences of insufficient oil investment. No matter how vigorously Europe, the United States and recently Asia promote environmental protection, the recent energy crisis should be enough to prove that the world is still dependent on fossil fuels. The Wall Street Journal quoted Barkindo as saying: "The energy crisis in Europe and many parts of the world is a wake-up call." He added: "It all returns to the investment issue of the entire oil and gas industry."

However, many OPEC members are suffering from chronic underinvestment , which was exacerbated by the massive blow to demand last year. Banks that are busy making net-zero commitments have also become reluctant to fund oil and gas projects, and the companies that are usually responsible for these projects-super giants and other large oil and gas companies-have also embarked on a net-zero path. .

According to oil analyst Irina Slav, most parts of the world may experience a difficult winter this year. Europe is on the brink of power outages unless it can ensure sufficient natural gas supplies. The United States is the safest, thanks to the country’s own oil production, but in terms of energy prices, it has not reached the level of safety it should be. OPEC may extend a helping hand because it realizes that if oil prices rise further, it will cause problems for everyone. But if demand continues to rebound as strongly as it is currently, Irina Slav questioned how long this rescue operation can last.

Based on the above news, in the case of a rebound in demand, limited oil supply capacity and insufficient industry investment have become the two major obstacles to OPEC's increase in production. Under this circumstance, the situation of high energy prices is likely to continue for some time, and there is even the possibility of further upward movement in the future. Investors must pay attention to this.



(Daily chart of Brent crude oil main contract)

GMT+8 At 9:31 on October 5th, the main contract price of Brent crude oil was reported at US$81.22/barrel.