Joe Raedle/Getty Images News
As OPEC+ meets to decide on their next adjustment to production quotas, news has emerged that the Kuwaiti candidate for OPEC Secretary General has been elected. This may not seem like much to the casual observer. But similar to how tanker rates could help us predict the outcome of a more contentious OPEC meeting months ago, this election is a good indicator for this meeting and for policy this year. You may also not read much about this elsewhere, as many OPEC+ watchers and "experts" have economic conflicts or simply don't want to risk access to their OPEC+ connections by addressing this, as I addressed previously.
The important fact to know coming into this is that Kuwait has more limited remaining spare capacity than other OPEC+ members. This is the result of detailed analysis by Bison shared here on Seeking Alpha. And has been corroborated by months of production increases lower than rising quotas have allowed and is predicted to continue to be an issue by Oxford Analytica, which cites "imminent capacity constraints."
Here's why this matters: there are some OPEC+ members that still have some spare production capacity. And there are others that have been unable or unwilling to increase their production in line with the increases in quotas this year. Bison has been tracking this monthly since the spare capacity white papers have come out, as seen in this November tracker:
Selecting a new leader for OPEC among the countries that has been missing its quota means that it is less likely that OPEC will be going in a market share war policy direction. This is because increasing quotas even more would benefit those countries still able to increase their production, and would hurt those unable to. And ironically, it might hurt all of the countries because, with low price elasticity, a small increase in oil production could have a large negative impact on price. This could explain why countries that still have some spare capacity remaining would support this policy and this candidate as the new Secretary General.
This matters more than ever as world oil inventories are declining:
Sources: Twitter, Kayrros
And as US oil inventories are showing a particularly precipitous decline:
Sources: Twitter, EIA, Giovanni Staunovo
Dan Tsibuchi of SAF Group illustrates what is happening here with some specific inventory numbers versus expectations, saying essentially that OPEC+ production increases are being fully absorbed into the market. "Vortexa crude oil floating storage for 12/31 est 86.82 mmb, -5.81 WoW vs revised up 12/24 92.63 mmb. 12/31 is basically flat to end of June when OPEC+ started big production increases, i.e., OPEC+ increased Oil volumes are being absorbed."
Sources: SAF Group, Bloomberg, Vortexa
As Bison discusses in "Embracing Volatility," as Covid Omicron rolls over and the world re-opens, oil demand is likely to continue to rebound substantially. With the Kuwaiti candidate as OPEC Secretary General, OPEC+ may not be there to fully supply the market, implying potentially much higher oil prices going forward.
Source: JP Morgan
And with insufficient spending over the last number of years on exploration, delineation and development of new fields, this problem could be exacerbated.
