A coalition of major oil producing countries agreed on Tuesday to further boost output to meet expectations for strong demand, despite concerns about the rapidly spreading Omicron variant of the coronavirus.
Policymakers from the Organization of the Petroleum Exporting Countries (OPEC), headed by Saudi Arabia, and a Russia-led group of allies known as OPEC-plus, said they would collectively ramp up production by 400,000 b/d in February, continuing a targeted pace of monthly supply increases the cartel began in August.
OPEC-plus officials cited Omicron as a concern, given that it is spreading quickly throughout the globe. The United States, for example, reported a record 1.08 million new coronavirus infections on Monday.
Still, cartel policymakers also emphasized early indications of the new variant causing less severe illness than previous forms of the virus. They said this provided confidence that governments around the world would refrain from instituting major new economic restrictions to slow spread of the disease, enabling the travel and business activity that fueled a resurgence in oil demand last year to continue into 2022.
Mexico is a member of OPEC-plus, although decrees from the cartel have had little impact on state oil company Petróleos Mexicanos (Pemex) under President Andrés Manuel López Obrador.
The president’s latest plan is for Pemex to phase out exports of crude oil entirely by 2023. The idea is for Pemex to process all of its own crude output by acquiring full ownership of the 340,000 b/d Deer Park refinery in Texas, rehabilitating its six existing refineries in Mexico, building a new coking unit at the Tula refinery, and completing the 340,000 b/d Dos Bocas refinery in Tabasco.
U.S. Gulf Coast refineries such as Deer Park are configured to process heavy sour crude grades such as Mexico’s Maya, which accounts for over 80% of Pemex oil exports, highlighted RBN Energy LLC’s Housley Carr on Tuesday. Pemex retains most of its lighter grades – Istmo and Olmeca – for processing at its domestic refineries, Carr said.
Pemex reported crude and condensate export revenues of 133 billion pesos ($6.5 billion) in the third quarter, with 58% of crude exports going to the United States. The company posted a 64.5% year/year increase in total export revenues, which the company attributed to strengthening of the Mexican crude oil export basket. The Mexico basket price stood at $71.85/bbl as of Tuesday.
Markets Aligned with OPEC
Rystad Energy analysts noted that Brent crude prices advanced more than 50% in 2021 and hovered around $80/bbl on Tuesday. They said that price level suggests markets are aligned with OPEC’s confidence, despite Omicron-related employee absences that have hampered airlines and forced companies to once again reassess plans to bring workers back to offices.
“For now, the Omicron risk remains exactly that, a risk. Instead of an outright deeper lockdown impact, market balances will remain somewhat tight for January and February and keep oil prices supported,” Rystad analyst Bjørnar Tonhaugen said.
OPEC-plus is unwinding supply cuts of nearly 10 million b/d made in April 2020 amid the initial oil demand destruction imposed by the coronavirus.
Mizuho Securities USA LLC’s Robert Yawger, director of energy futures, said the OPEC-plus decision to continue supply increases “was made easier” by the fact that Libyan production dropped by an estimated 550,000 bbl in recent days amid political strife and pipe leaks in the troubled country. Additionally, he noted, OPEC-plus member Nigeria has struggled to meet its increased production quota in recent months because of deteriorating infrastructure.
Members of an OPEC-plus committee said Monday that they expect a global supply surplus of 1.4 million b/d by the end of the first quarter. That was 25% smaller than the producer group’s estimate from a month earlier, Yawger noted, but it still could give the cartel reason to pause supply increases in March.
OPEC-plus is scheduled to meet next on Feb. 2 to determine production plans for March.
In the meantime, U.S. producers have also gradually ramped up crude output.
The U.S. Energy Information Administration’s (EIA) latest Weekly Petroleum Status Report showed American crude output reached 11.8 million b/d for the week ended Dec. 24 – a 2021 peak and up 200 million b/d from the previous week.
Over the four-week period ended Dec. 24, U.S. gasoline consumption averaged 9.3 million b/d, up 17% from a year earlier, while distillate fuel demand averaged 4.1 million b/d, up 8%. Jet fuel consumption spiked 21% to 1.5 million b/d.
In December, the International Energy Agency (IEA) forecast global crude demand would grow by 3.3 million b/d in 2022, reaching pre-pandemic levels of 99.5 million b/d, after gaining 5.4 million b/d in 2021.
Separate from the production policy meeting, OPEC this week appointed a long-time Kuwaiti oil official as its next secretary general. The cartel said Haitham al-Ghais would replace current secretary-general Mohammad Barkindo, a former Nigerian oil official who has held the job since 2016. Haitham al-Ghais will take the reins in August, when Barkindo’s second term ends.
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