Oil market likely to require fast supply hike in near term
While the situation in the global oil market remains uncertain amid mixed signals of progress of the COVID-19 pandemic, there are signs that oil deficit may soar faster than producers recover their output.
Russia’s hard-won crude output quota increase will come in handy in 2021, as the recovering market calls for additional barrels, considers S&P Global Platts. However, the country needs to maintain production flexibility and sufficient spare capacity to ensure stable supply in the long term. The country’s output quota within the framework of the current OPEC+ agreement currently stands at 9,249 million bpd excluding condensate and will increase by further 130,000 bpd in April.
In May 2020, Moscow committed to cutting crude production by an impressive 1,8 million bpd (18% compared to April) and almost fully fulfilled the promise. Now the country’s Ministry of Energy plans to restore 45% of the reduced production volume by April. S&P Global Platts Analytics expects Russia’s spare capacity to “fall below 1,1 million bpd in March in line with its OPEC+ quota increase”.
Since the beginning of the OPEC+ cut policy, Russian oil companies have shown notable flexibility in managing production levels depending on market conditions. However, they may face some obstacles while recovering production once the restrictions are eased, considers Director of Oil & Gas Industry Regulatory Consulting at Vygon Consulting Daria Kozlova. “There are some peculiarities. Due to the geological and technical features of the fields in Russia, especially in traditional regions such as Western Siberia, increasing drilling is required to restore production,” she explains.
Monthly changes to the OPEC+ quotas also bring additional uncertainty to investment planning, which may affect Russia’s spare capacity in the future, says Kozlova. “The market is recovering, and given the decline in investment in exploration and production, there are risks of a new deficit in supply, and oil prices as high as $200 per barrel no longer look unreal.”
CEO of Lukoil Vagit Alekperov raised the same concern last week warning of a possible global oil supply deficit in the next five years due to insufficient investment. According to Lukoil’s management, its spare capacity of 180,000 bpd is set to drop over time due to revisions in the company’s well optimisation programme and “may take some time to recover to early 2020 levels”.
The Russian government still has no final decision on its programme for unfinished wells. The initiative, which was announced in September 2020, entails well drilling activities even amid lower demand in order to maintain the industry’s potential capacity. The Kremlin sees global oil supply in a deficit of 1-2 million bpd at the moment, while S&P Global Platts Analytics expects that the call on Saudi and Russian crude may rise to 10-10,5 million bpd by year end.