Opec+ meets to assess output as Russia-Ukraine war intensifies geopolitical pressures

Group reiterates its stance to shun politics and base its crude production decisions on market dynamics

The group of crude producers has resisted calls to increase output amid soaring crude prices. Reuters
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The Opec+ group of oil producers is meeting this week with clear signals that it is not willing to let global geopolitics dictate its output policies and undermine efforts to stabilise a volatile crude market rocked by the Russia-Ukraine crisis.

Despite calls for the supergroup of producers to increase production in a tight market and soaring oil prices that are feeding into rising inflation, the group, which will congregate online on Thursday, is expected to stay the course and roll over planned production increases in May.

Opec+, which is led by Saudi Arabia and Russia, is “likely to endorse plans for another moderate increase in oil production”, said Edward Bell, senior director of market economics at Emirates NBD.

From May 2022, the group is expected to follow the new higher baseline levels for several producers in the alliance and an additional 430,000 barrels per day of oil are expected to be added to market on a monthly basis, compared with 400,000 bpd, which had been the monthly target since the third quarter of last year.

“Messaging from Opec+ ministers has been consistent that they will not willingly oversupply markets even as importing nations call for higher production,” Mr Bell said.

A potential de-escalation in the intensity of the Ukraine war after Russia – the world’s second largest producer of oil – pledged on Tuesday to significantly reduce military operations around Kyiv, strengthens the Opec+ case of sticking to its output increase schedule.

The US and its allies in Europe, however, are sceptical of Russia’s announcement and said they will judge Moscow on its actions rather than its words.

Oil prices that climbed to a notch under $140 per barrel earlier this month, a 14-year high, declined initially after the Russian pledge, but regained upward momentum on Wednesday. They retreated overnight again following reports that he US is considering releasing crude from its strategic petroleum reserves equivalent of around 1 million barrels a day for several months.

Brent, the global benchmark for two thirds of the world's oil, was 4.54 per cent lower at $108.3 per barrel at 7.27am UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, was down 5.43 per cent, trading at $102 a barrel at 8.15am UAE time. Brent is up 45 per cent since the start of the year.

The group of crude producers has resisted calls from the US, its European allies and other oil importing nations to increase output amid soaring crude prices and has stuck to its agreed output hikes so far.

On Monday, UAE Minister of Energy and Infrastructure Suhail Al Mazrouei, said the UAE will work within the framework of the Opec+ alliance to ensure the stability of the energy market and that the group's oil production plans must stay independent of politics.

The country is investing in building its capacity to five million bpd but this does not mean it will leave Opec+ or act unilaterally, he said at the Global Energy Forum in Dubai.

Despite volatility in oil markets, the minister urged Opec+ members to stay together and remain focused.

His message was echoed by Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman on Tuesday, who told the World Government Summit that global oil price volatility would have been worse without the efforts of Opec+.

Russia, which produces about 10 million barrels per day or about 10 per cent of the world's global output, makes a sizeable contribution to energy markets, and Opec+ must “compartmentalise” political differences for the collective good, he said.

The producers’ alliance has “made its position clear that it doesn't want to get involved in any political tensions, and Russia will stay part of Opec+", said Naeem Aslam, chief market analyst at Avatrade.

“The only question standing in front of traders now is how much more oil we will see from Opec in its meeting.”

For several months, the 23-member Opec+ alliance has worked to bring back 5.8 million bpd in production cuts to restore supply that was greatly reduced after the onset of the Covid-19 pandemic in 2020. The alliance achieved a historic reduction of 9.7 million bpd between May 2020 and July of last year.

In the near term, energy markets could tighten further with demand up almost three million bpd over last year, reaching pre-pandemic levels in the fourth quarter, Dr Sultan Al Jaber, Minister of Industry and Advanced Technology and UAE Special Envoy for Climate Change, said this week at the energy summit.

However, Opec+, which has been shepherding oil prices since 2016, has little spare capacity and most of its members lack the ability to boost production due to years of underinvestment in the upstream oil and gas infrastructure.

Annual investment into oil and gas is $200 billion below where it needs to be and that is just to keep up with demand through 2030, Dr Al Jaber said.

In this scenario, the pressure on oil prices is likely to remain, Monica Malik, chief economist at Abu Dhabi Commercial Bank, said in a research note.

“The increased geopolitical tensions in Eastern Europe and elsewhere highlight the fragile oil market conditions, given limited global spare capacity,” she said.

“The IEA [International Energy Agency] recently estimated that circa three million bpd of Russian oil and products may not find buyers from April, which, if correct, cannot be replaced by other sources immediately, putting upside pressure on the oil price.”

On the demand side, the rapid rise in Covid-19 case numbers in China and the lockdown of Shanghai is likely to dent oil consumption, according to ADCB.

“Amidst this uncertain backdrop, we expect Opec+ to maintain a cautious wait-and-see approach until there is further clarity on the supply and demand outlooks,” Ms Malik said.

Going forward, the alliance will have to factor in Iranian barrels coming to the market if Tehran manages to conclude a nuclear deal with the US and its allies. Iran has been exempt from the production cuts under the Opec+ agreement because its crude oil production is limited by US sanctions.

Iran, one of the larger Opec producers, will be able to boost exports by about a million barrels per day within a matter of months once sanctions are lifted. The US Energy Information Administration estimates Iran’s production could return to full capacity, at 3.8 million barrels per day, if Washington lifts the sanctions.

There is no indication yet, however, when Tehran will be able to strike a deal with the West.

“One factor that can significantly shift oil supply is if Iranian oil comes back to the market, and looking at the circumstances, it doesn't seem that is going to happen that easily,” Mr Aslam said.

The IEA has called an emergency ministerial meeting for this Friday to discuss the state of the oil market, a spokesperson for Australian energy minister Angus Taylor said on Thursday, Reuters reported.

Updated: March 31, 2022, 5:40 AM