Dubai — UAE's energy minister has cautioned against a rush by non-OPEC+ countries to overproduce at a time when demand is beginning its recovery from COVID-19-induced weakness and OPEC+ members are attempting to rebalance the market via output cuts.
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"There needs to be discipline among other producers as well if we are serious about coming back to the supply and demand balance."
OPEC and its allies, including Russia, agreed on June 6 to roll over their 9.6 million b/d in collective production cuts through July, to help bolster the market as it emerges from the depths of the COVID-19 pandemic.
Under the deal, Angola, Iraq, Kazakhstan and Nigeria committed to compensating for their lack of compliance in May with extra cuts under their quotas in July, August and September.
OPEC+ under-compliance
Mazrouei said he had confidence that countries that didn't comply with their quotas in May would make up for the under-compliance in the coming months.
The 23-member coalition began in May a historic 9.7 million b/d cut, with a gradual easing of curbs through to April 2022.
The UAE, OPEC's third largest oil producer, is also trimming an extra 100,000 b/d in June, on top of its OPEC+ commitments, joining Saudi Arabia's 1 million b/d and Kuwait's 80,000 b/d voluntary cuts in June.
OPEC is still aiming to reduce inventories to their five-year average and want a fair and reasonable oil price, Mazrouei said.
"One challenge is to reduce inventory level to the five-year average," he said. "We can only do that with a good pace if we try to control the production and adjust them. This environment of low oil and gas prices I don't think it is sustainable, I think we will go back to normal."
Investments
The OPEC+ cuts are also needed to keep investors interested in investing in the energy industry, the minister added.
"With the cut that we have done with the OPEC+, we think we can maintain a reasonable level of investments to stay and support that sustainability of supply," said Mazrouei. "If that level of investments is not there then we are going to have not just a low oil price environment, we will have a shock in the oil environment if many countries shut down their production."
Global energy investment is forecast to plunge by 20%, or almost $400 billion, in 2020, which is set to mark the largest ever collapse in global energy investment in history, the International Energy Agency said in a report on May 27.
The decline will take the heaviest toll on oil, with global consumer spending on the commodity set to fall below the amount spent on electricity for the first time, the IEA added.
Marginal producers
"There are producers who can't be there if oil prices are staying lower than $40/b or $50/b," said Mazrouei. "That is a territory where you will lose many of the marginal producers and you will also lose some of the investments that investors are putting in this sector. And we have seen this in shale oil."
The US Energy Information Administration has predicted US oil output to average 11.56 million b/d in 2020, a downward revision of 130,000 b/d from May's forecast, with 2021 output averaging 10.84 million b/d, down 60,000 b/d from last month, according to the Short-Term Energy Outlook for June.
This year will mark the first decline in US oil production since 2016.
Spare capacity
The UAE is also planning to carry on with plans to boost its oil production capacity to 5 million b/d by 2030 from the current 4.2 million b/d, in case producers, including marginal ones cannot pump as much oil as before, the minister said. The UAE will use the extra barrels as spare capacity that can be used when needed to fill gaps in the oil market.
"When this pandemic is over we will see some drop by some of the marginal producers in the coming years before 2030," said Mazrouei
"You are not going to create resources out of the blue and those unconventional ones are going to be more expensive."