Opec+ will add another 432,000 barrels per day of crude to the market in May, staying the course of incremental increases in global oil supply as the US government announced plans to release massive inventory from its strategic reserve to tackle soaring inflation and petrol prices.
The 23-member super group of producers, led by Saudi Arabia and Russia, agreed to bring the additional barrels in their online meeting on Thursday. The group will hold its next meeting on May 5 to review market dynamics, it said in a statement.
"Continuing oil market fundamentals and the consensus on the outlook pointed to a well-balanced market, and that current volatility is not caused by fundamentals, but by ongoing geopolitical developments," the statement said.
The decision to increase output followed earlier reports that the US government was considering the release of about 1 million barrels of oil per day from its strategic petroleum reserve (SPR). A total of 180 million barrels could be released over to rein in inflation in the world’s biggest economy.
The White House on Thursday formally announced the biggest-ever release from its SPR, and said it will continue to add additional barrels to the market for the next six months.
It is the third time the country is tapping into its SPR in the past six months. The US released 60 million barrels from the reserve in November. It has committed 30 million barrels as part of the International Energy Agency’s (IEA) move to release 60 million barrels from emergency stocks.
The US move will likely reinforce plans of the alliance to “only incrementally add production back to markets … as consuming nations take emergency steps to limit the pass-through effects of high energy prices,” said Daniel Richards, Middle East and North Africa economist at Emirates NBD.
Oil prices fell sharply on reports of US plans to release more inventory. Brent, the global benchmark for two thirds of the world's oil, was 4.62 per cent lower at $108.2 per barrel at 7.29pm UAE time on Thursday. West Texas Intermediate, the gauge that tracks US crude, pared some earlier losses to trade 4.42 per cent lower at $103 a barrel.
Opec+ on Wednesday removed the IEA from its trusted data sources. The Joint Technical Committee, which advises Opec+, decided to replace the IEA data with reports from Wood Mackenzie and Rystad Energy, Reuters reported, citing sources.
The Paris-based IEA advises Western governments on energy policy and has the US as its top financier. The agency's executive director Fatih Birol has been openly critical of Opec+ members calling on leading producers to do more. Mr Birol is an economist who previously spent five years at Opec in the early 1990s.
IEA member countries are planning to meet on Friday after the agency last week said it could release more oil into the market “if needed” to tackle soaring prices. The IEA has so far committed to release 61.7 million barrels of oil, about 4 per cent of the group's total reserves.
“An SPR release is not without its risks,” said Edward Bell, senior director of Market Economics at Emirates NBD. “Even if extended over a six-month period … the SPR release wouldn’t be enough to compensate for what is appearing to be a material disruption to Russian crude flows.”
After an online meeting of the bloc's technical committee on Wednesday, Opec secretary general Mohammad Barkindo reiterated the importance of the group's role in supporting stability and the rebalancing in the global oil market and said the member countries have done “heavy lifting” and were “instrumental" in support efforts.
“We urge global leaders to follow this example of multilateralism to … ensure an unhindered, stable and secure flow of energy to the whole world,” he said.
He asked the member countries to stay the course and remain attentive to ever-changing market conditions.
“We must remain focused on balancing the oil market,” he said.
The producers’ alliance 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 increases so far.
The alliance this week sent clear signals that it was unwilling to let global geopolitics dictate its output policies and undermine efforts to stabilise a volatile crude market.
Suhail Al Mazrouei, Minister of Energy and Infrastructure, 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.
His message was echoed by Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman, who said global oil price volatility would have been worse without the efforts of Opec+.
Russia, the world's second largest energy exporter, produces about 10 million bpd or about 10 per cent of global output, and Opec+ must “compartmentalise” political differences for the collective good, he said.
For several months, the 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.
From May 2022, the group will follow the new higher baseline levels for several producers in the alliance and an additional 432,000 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.
Oil markets have been extremely volatile this year, rocked by Russia’s war in Ukraine which is threatening global energy supplies. Brent, which climbed to a notch under $140 per barrel this month, a 14-year high, has given up some gains but is still up about 45 per cent since the start of this year.
MUFG Bank, Japan's biggest lender, said the current pull back is “detached with market fundamentals” and oil prices have the potential to rise further.
“This, combined with the physical decoupling from Russian commodities only just starting out, sets the stage for the next rally.”
Ipek Ozkardeskaya, a senior analyst at Swissquote Bank agreed, and said “the price pull backs are still seen as interesting dip buying opportunities to strengthen long positions”.
In the near term, energy markets could tighten further with demand up almost 3 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.
Mr Barkindo welcomed plans by industry stakeholders to increase investment and launch new projects, including Aramco’s intention to boost upstream capital spending by about $50 billion this year.
“This underscores the commitment of the kingdom of Saudi Arabia to address the world's future energy needs,” he said.