Oil market realizing many OPEC producers may not have the capacity to boost output much further
As the OPEC+ group unwinds its production cuts, the oil market has realized that not only do many producers in the pact lack the capacity to boost output further, but those who can pump more are reducing the global spare production capacity, thus exposing market balances to unexpected supply disruptions, and oil prices to further spikes. Most of the world’s global spare capacity is currently held by OPEC’s Middle Eastern members Saudi Arabia and the United Arab Emirates (UAE). Those two producers have the potential to raise their output as OPEC+ continues to unwind the cuts, but they are doing so at the expense of declining spare capacity.
Low spare production capacity could set the stage for a prolonged oil price rally because the world would have a lower buffer to offset sudden supply disruptions, which are always lurking in the global oil market.
The unrest in Kazakhstan and the blockade in Libya in the past month highlighted the challenge that the oil market will be facing if spare capacity continues to shrink. And shrink it will—that is, if OPEC+ continues to add 400,000 barrels per day (bpd) to its production quota every month until it unwinds all the cuts.
Higher OPEC+ Production Means Lower Spare Capacity
The problem with OPEC+ is that only a handful of producers can keep some capacity in reserve while raising production. The few who can include OPEC’s top producer and the world’s largest oil exporter, Saudi Arabia, the UAE, and to some extent, Kuwait and possibly Iraq. Iran, under US sanctions, has over 1 million bpd that could return to the market. But Iran will be able to tap that capacity only if the ongoing nuclear talks are successful—a development that many analysts doubt will occur anytime soon.
With Iran currently out of the equation, it’s mostly up to the Arab Gulf states to produce more oil and at the same time have some spare capacity left. The other issue is that the nameplate spare capacity may not be equal to the producers’ ability to pump oil—the limit of spare capacity has never been tested, even in Saudi Arabia.
Sure, the United States, Canada, and Brazil—all of which are outside OPEC+ pacts—are expected to raise their oil production this year as high prices and growing demand incentivize more activity and drilling. In the US shale patch, however, capital discipline continues to be a key theme, so annual production increases are not expected to be anywhere near the 2018-2019 surge in output.
With demand expected to exceed pre-Covid levels this year, the low spare capacity and the low upstream investment in recent years are setting the stage for even higher oil prices.
OPEC+ will see its spare capacity reduced to just 2.3 million bpd by July 2022, at the height of the driving season, according to Bloomberg estimates. This would be the lowest spare capacity since the end of 2018. Most of it will be held by the Arab Gulf producers—the only ones thought to be able to pump to their OPEC+ quotas throughout this year.
Even Russia is struggling. Russia has seen setbacks recently in its attempt to pump to its quota, and will likely continue to lag in the coming months, analysts tell Bloomberg. Russia may be able to raise its output by 60,000 bpd each month in the first half of 2022—just over half of the monthly production growth of 100,000 bpd it is entitled to, according to analysts polled by Bloomberg.
Triple-Digit Oil
Russian supply will level off in the next two months, Francisco Blanch, head of global commodities at Bank of America, told Bloomberg last week, saying that triple-digit oil “is in the works” for the second quarter this year.
Demand is recovering meaningfully, while OPEC+ supply will start leveling off within the next two months, Blanch said, noting that it will be only Saudi Arabia and the UAE that can produce incremental barrels to add to the market.
Moreover, OPEC+ has been undershooting its collective production targets for months and will likely continue to do so in the months ahead.
Even OPEC officials admit that the OPEC+ group will struggle to increase supply as much as the nameplate monthly increase allows, and prices could spike to $100 a barrel, some officials from OPEC producers have recently told Reuters.
Apart from Bank of America, other major Wall Street banks also predict that declining spare capacity and the inability of OPEC+ producers—except for just a few—to boost production will lead to triple-digit oil prices.
Oil prices could hit $100 this year and rise to $105 per barrel in 2023 on the back of a “surprisingly large deficit” due to the milder and potentially briefer impact of Omicron on oil demand, Goldman Sachs said last week. Due to gas-to-oil substitution, supply disappointments, and stronger-than-expected demand in Q4 2021, OECD inventories are set to dip by the summer to their lowest levels since 2000, Goldman’s analysts note. Moreover, OPEC+ spare capacity is also set to decline to historically low levels of around 1.2 million bpd.
“At $85/bbl, the market would remain at such critical levels, insufficient buffers relative to demand and supply volatilities, through 2023,” Goldman Sachs said in a note.
JP Morgan, for its part, expects the falling spare capacity at OPEC+ to increase the risk premium in prices, and sees oil hitting $125 a barrel this year and $150 a barrel next year.
“We see growing market recognition of global underinvestment in supply,” the bank said in a note carried by Reuters.
The world’s number one cryptocurrency, Bitcoin, has declined to nearly $33,000 on Monday, marking a daily drop of nearly 5%, according to data tracked by CoinDesk. The second most popular crypto, Ethereum, plunged 9.3% to $2,209 in a 24-hour span.
Earlier in the day, both tokens fell to their lowest since July, each dropping more than 50% from their all-time highs.
The major sell-off wiped nearly $130 billion off the value of the entire cryptocurrency market, and spread across the stocks, which extended losses recorded earlier this year, posting the worst week since March 2020.
Riskier assets like technology stocks and digital currencies have seen a heavy sell-off due to increased geopolitical risks related to the conflict between Russia and Ukraine, as well as the latest push by the US Federal Reserve for tightening monetary policy at a faster pace than expected.
Moreover, investors are assessing the impact of further regulatory steps towards the cryptocurrency market across the world. Last week, the Central Bank of Russia’s proposed ban on the use and mining of digital currencies. Last year, the Chinese authorities prohibited cryptocurrency mining in the Sichuan Valley, triggering an adverse impact on the market.
“Bitcoin and crypto have been reacting much more violently, given the nature of the asset class, and we’re likely to test $30,000-$32,000 given current sentiment and momentum,” Vijay Ayyar, vice president of corporate development and international expansion, told CNBC.
US electric car manufacturer countersues banking giant over disputed bond contract
Tesla submitted a filing in Manhattan federal court on Monday, accusing JPMorgan of “bad faith and avarice” for demanding $162.2 million after the bank had unilaterally changed the terms of warrants it received when the electric carmaker sold convertible bonds back in 2014.
Warrants allow holders to purchase company stock at a set “strike” price and date.
“JPMorgan pressed its exorbitant demand as an act of retaliation against Tesla both for it having passed over JPMorgan in major business deals and out of senior JPMorgan executives’ animus toward Mr. Musk,” Tesla said, adding that by changing the terms the banking multinational “dealt itself a pure windfall” after receiving a “multibillion-dollar payout” from Tesla’s soaring share price.
Tesla’s countersuit escalates the conflict between the US’ biggest investment bank and the world’s most valuable automaker, which have hardly done any business with each other since the disputed contract.
The legal battle began last November, when JPMorgan took Tesla to court for “flagrantly” violating a stock warrants contract. The bank alleged that the car manufacturer sold warrants to JPMorgan in 2014, which were to be paid off if their strike price, or guaranteed fixed price, was below Tesla’s share price upon the warrants’ expiration in June and July 2021.
JPMorgan claimed that the tweet shared by Tesla’s eccentric CEO Elon Musk on August 7, 2018 made the automaker’s share price more volatile. Musk tweeted that he might take Tesla private and had “funding secured,” but backtracked his comments 17 days later. Tesla’s share price had risen nearly ten-fold by the warrants’ expiration date.
Musk’s tweets led to a civil lawsuit by the US Securities and Exchange Commission. The litigation resulted in Musk giving up Tesla’s chairmanship, and he and the company each being fined $20 million.
El Salvador reportedly lost an estimated $20 million by investing in Bitcoin
El Salvador’s president, Nayib Bukele, changed his Twitter profile on Sunday, posting a photoshopped image of himself wearing a McDonald’s uniform. This comes after his country lost millions – by investing in Bitcoin – following a severe crypto market sell-off.
The two largest digital assets, Bitcoin and Ethereum, are off more than 50% from their all-time highs, trading at their lowest levels since July.
The market’s downturn has prompted jokes about new careers for crypto traders in the fast food industry. McDonald’s pay starts as low as $11 per hour in the US.
Bukele has been facing criticism since he embraced the flagship cryptocurrency. El Salvador was the world’s first nation to adopt Bitcoin as legal tender in June 2021. The country currently holds over 1,500 bitcoins and plans to issue a $1 billion, 10-year Bitcoin bond this year.
The only saving grace for El Salvador is that the price of Bitcoin dipped below $30,000 last summer, so the Central American country has only reportedly lost about $20 million by investing in the leading crypto.
The call for a more moderate approach comes days after the central bank unveiled proposal for a total ban on cryptocurrencies
Cryptocurrencies should be regulated in Russia, but not banned, according to Ivan Chebeskov, the Director of the Financial Policy Department of the Ministry of Finance.
“Technologies of this kind should get a chance to develop,” the official said during a conference organized by Russian business-focused media RBC.
“In this regard, the Finance Ministry is actively working on legislative initiatives aimed at regulating this [cryptocurrency] market. And for now, we have prepared a draft concept plan for regulatory measures that is currently discussed in the Ministry, and that has been sent to the state administration,” Chebeskov added.
According to the official, Russian authorities should protect the interests of those purchasing cryptocurrencies or using them in any technological solutions.
“I think it is necessary to regulate, not to ban; regulation will just ensure the transparency that will ensure security for citizens,” he said, stressing that Russia just cannot afford to ban a highly developed technological sector.
The official’s response came after the latest call for a complete ban of cryptocurrencies in Russia issued last week by the central bank. The regulator said that the issuance, circulation, exchange, and trade of cryptocurrencies and stablecoins should be prohibited along with the organization of these operations in the country.
