Opec+ will bring 400,000 barrels per day of crude to the market in April, sticking to its schedule of monthly increases in crude production, despite lingering concerns that an escalation in the Russia-Ukraine conflict could potentially disrupt global energy supplies.
The 23-member super group of producers, led by Saudi Arabia and Russia, agreed to bring the additional barrels next month in their online meeting on Wednesday. The group will hold its next meeting on March 31, it said in a statement on Wednesday.
The producers' decision comes as oil prices rally to a seven-year high with the International Energy Agency (IEA) warning of an energy security threat as the war in Ukraine intensifies.
Brent, the global benchmark for two thirds of the world's oil, was 5.61 per cent higher at $110.90 per barrel at 7.20pm UAE time on Wednesday. West Texas Intermediate, the gauge that tracks US crude, was up 5.22 per cent, trading at $108.80 a barrel.
The Russia-Ukraine war comes against a backdrop of “already tight global oil markets, heightened price volatility, commercial inventories that are at their lowest level since 2014 and a limited ability of producers to provide additional supply in the short term”, the Paris-based agency said.
“The situation in energy markets is very serious and demands our full attention. Global energy security is under threat, putting the world economy at risk during a fragile stage of the recovery,” IEA executive director Fatih Birol said.
Russia, one of the top crude producers in the world, is facing severe punitive actions from the US and its allies that are aimed at crippling its economy and banking industry. The West has so far abstained from imposing sanctions on Russia’s energy and commodity industries that are vital to the global economy.
In 2020, Russia produced about 10.2 million bpd of crude oil and natural gas condensate, placing it second after the US, with Saudi Arabia in third place, according to the 2021 BP Statistical Review of World Energy. About 60 per cent of Russia’s oil exports go to Europe and another 20 per cent to China.
Traders and analysts were largely expecting Opec+, which has been shepherding oil prices since 2016, to stay the course, adhering to its monthly tapering of oil output caps.
Most market observers do not expect additional supply from Opec+ and the IEA oil release to change the dynamic of a structurally tight oil market or curb the rise in crude prices.
It "will not derail the powerful bull oil market", Ehsan Khoman, head of emerging markets research at Japan's largest lender, MUFG Bank, said.
"The immediate rally in oil prices is a testament that markets are already looking through the [IEA] announcement and remain squarely focused on the extreme state of shortage oil markets are in today corroborated by the super backwardation levels with Brent crude prompt timespreads currently trading $5 a barrel above the next month – an unprecedented level that indicates traders are paying huge premiums to secure more immediate supply," Mr Khoman said.
The co-ordinated release of stocks by the IEA, which has historically only released stocks during the Gulf War, Hurricane Katrina, and Libyan civil war, not only "failed to bring calm to the oil market, but further stoked panic" as it was a signal from the group that "what lies ahead is higher oil prices", Rystad Energy said.
The IEA move, though it seems on paper, "is still just a drop in the ocean compared to the 4-5 million bpd of Russian crude exports at risk, in addition to the more than 2 million bpd of Russian refined products", it added.
Following an online meeting of the bloc's Joint Technical Committee on Tuesday, Opec secretary general Mohammad Barkindo reiterated the group's role in bringing stability to the oil markets.
“No matter what challenges we may face, our efficacious and proven ... framework will continue to be the modus operandi for our joint success and help move us, step by step and day by day, closer to achieving our common objectives,” he said.
“This nimble and measured approach will once again pay off.”
Opec+ will continue to monitor developments in the market “very closely in the days and weeks to come”, Mr Barkindo said.
The bull-run of oil prices, which rose 67 per cent last year, is also supported by continued global economic recovery. Countries around the world are easing pandemic-related restrictions that bodes well for accelerating growth momentum. Global oil demand is projected to rise by 4.2 million bpd this year, according to Opec’s latest monthly oil market report.
However, the inability of oil producers to achieve their planned supply output increases in full in recent months means that Opec+ may not be able to produce enough crude to meet demand, driving oil prices even higher.
Underinvestment in oil and gas production over the past few years has also hindered the ability of producers to increase output at short notice.
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.
Oil prices could hit $130 a barrel by June if the Ukrainian conflict disrupts Russian crude flows and surge beyond that if the crisis escalates further.
Higher prices are a major economic threat to oil-importing countries still recovering from two years of pandemic, Rystad Energy said.
"As the realities of the Ukraine-Russia situation bite once again, I intend to stick to my view that Brent crude will top $120 a barrel and could trade near to $130 a barrel,” Jeffrey Halley, senior market analyst at Oanda, said. “That will be the price of the world holding its nerve to cripple Russia’s economy."