The situation for the super group that has been shepherding oil prices since 2016 could not be more sensitive as energy ministers of the bloc prepare to convene virtually this Wednesday. Russia is one of the top crude producers in the world.
Despite rising concerns about a possible disruption to global energy flows in an already tight market, the group is expected to stay the course and bring another 400,000 barrels per day of crude to the market in April.
“We expect that Opec+ will endorse its plan to increase production for April by 400,000 barrels a day, in line with its strategy of returning all production taken out of the market during the peak of the Covid-19 pandemic,” said Edward Bell, senior director of market economics at Emirates NBD.
“In terms of oil market balances, conditions now are essentially the same as they were a few weeks ago. Balances are tight, helping to keep spot prices high and supporting a wide backwardation in the futures curve.”
Brent, the global benchmark for two thirds of the world's oil, was 5.37 per cent higher at $103.23 per barrel at 4.21am UAE time on Tuesday. West Texas Intermediate, the gauge that tracks US crude, was up 4.57 per cent trading at $100.09 a barrel.
Crude, which surged to more than $105 per barrel last week, has stayed buoyant in the past few months as the global economy continued to recover from the pandemic-driven slowdown, despite the emergence of new Covid-19 variants last year. That has largely been a reflection of a faster than expected economic recovery, high demand and limited production capacity due to years of underinvestment in the energy industry.
The Russia-Ukraine crisis has exacerbated the upward trajectory.
The US and EU allies have levied a slew of sanctions against Russia for its military offensive in Ukraine. The measures include limiting Moscow's ability to do business in dollars, euros, pounds and yen as well as the freezing of Russian assets, barring a number of lenders from the Swift payments network and limiting the ability to raise funding in European financial markets.
Due to Russia's clout as a global energy player and its economy being closely intertwined with European countries the US and EU have so far stopped short of imposing sanctions on Russia’s oil and gas industries.
In 2020, Russia produced about 10.2 million barrels per day of crude oil and natural gas condensate, placing it second after the US, with Saudi Arabia in third, the 2021 BP Statistical Review of World Energy reported. It is also the second-largest producer of natural gas in the world and a major source of other commodities including nickel, aluminium, palladium, cobalt, copper, wheat and barley.
Although, Russia’s energy sector has escaped the sanctions net, analysts say oil prices could hit $130 a barrel by June if the Ukrainian conflict disrupts Russian crude flows and even surge beyond that if the crisis escalates.
Demand destruction is the only thing that can stop oil shooting higher, said Goldman Sachs, which has raised its one-month forecast for Brent to $115 a barrel from $95, with significant upside risks on further escalation or longer disruption.
Hurdles created for payments systems following sanctions should exacerbate the already visible commodity supply shock, Goldman Sachs analysts Damien Courvalin and Jeff Currie said.
“Commodity markets need to reflect not only these difficulties in paying for Russia’s exports but, with little left to sanction, the risk that Russian commodities eventually fall under western restrictions,” they said. They added it is an outcome which the US is no longer ruling out.
Energy Aspects, a research consultancy considered an authority on the energy industry, has raised its forecast on Brent to an average of $101 per barrel in 2022 and does not expect sanctions to target Russia's energy industry.
Despite rising concerns about supply disruptions as Europe relies heavily on Russian oil and gas, Opec+ ministers pushed back last week against the idea of increasing output at a faster pace.
Looking ahead, alliance will need to factor Iranian barrels coming to the market if Tehran strikes 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 remains limited by US sanctions.
Iran, among 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.
Despite the fluid situation that has developed Monica Malik, head of research at Abu Dhabi Commercial Bank, said that Opec+ is unlikely to waver from the course.
“We expect the group to continue with its agreement to increase output for April … we do not expect any change in its stance at this point, despite increasing supply-side uncertainty,” Ms Malik said.
“The Saudi energy minister … recently highlighted the importance of Opec+ group cohesion for the long-term stability of the oil market. We see this as an indication that Opec is looking to continue with its oil supply-related partnership with Russia.”
Oil prices have risen more than 67 per cent in the past year, partly driven by oil supply shortfall from Opec+ countries. The market could tighten further and push prices higher as producers continue to struggle to meet their supply quotas, the International Energy Agency said.
The bloc’s prolonged underperformance has effectively taken 300 million barrels, or 800,000 barrels per day, off the market since the start of 2021, the Paris-based agency said in its monthly market report.
“That shortfall is expected to deepen as some Opec+ members struggle with production constraints, exacerbating market tightness,” it said.
Spare capacity is almost entirely held by two producers — Saudi Arabia and the UAE, the IEA report said.
Opec+ had shown no inclination last week to increase production, primarily due to the fact many producers were already struggling to reach their production targets "while Russia, if allowed, is likely to hit its production limit within months”, Ole Hansen, head of commodities strategy at Saxo Bank, said in a note last week.
Brent is expected to “overshoot” $125 a barrel this year and $150 a barrel in 2023, given that Opec's spare capacity is below market expectations and impedes its ability to respond to high oil prices, JP Morgan said in December.
In a research note, Japan's largest lender MUFG said its “bull case for commodities rests not on the current geopolitical tensions, but rather on the structural underinvestment thesis centred on the lack of investments in commodity supply capacity”.