Opec+ meets to discuss output as oil surges

Oil producer group may exempt Russia from production deal as EU agrees on a partial ban of Russian oil imports

Oil pump jacks in a field in Russia. Moscow is facing a tightening net of western sanctions in response to its military operation in Ukraine. Bloomberg

Opec+ is meeting on Thursday amid a rapidly changing energy market, with the producer group reportedly considering exempting Moscow from its production deal and as the EU agree on a partial ban of Russian oil imports.

Prospects of China’s economic activity revival are also brightening with the easing of coronavirus-related restrictions, a move that could have a telling effect on global crude demand.

There will be a lot for the group to consider when it convenes online. However, given the output capacity restraints of its 23 members, the alliance is expected to stick to its output plan and add 432,000 barrels a day of crude to the market in July.

“We expect Opec+ to keep its output policy steady,” said Thirumalai Nagesh, an economist at Abu Dhabi Commercial Bank.

“The group's production has been consistently lower than the planned increase as a number of countries are struggling to supply their allotted quotas.”

The Opec+ undersupply picture is “quite stark” and the group should have collectively returned 7.4 million bpd of the original 9.7 million bpd of supply cuts by April, a National Bank of Kuwait report said.

However, it has managed to return 4.7 million bpd of that target to the market, the NBK report said.

The group had planned to increase monthly supply by a combined 432,000 bpd from May but, “given the preponderance of supply outages and limited spare capacity”, there is little likelihood of that, said Omar Al Nakib, senior economist at NBK.

“Only the Gulf Arab oil exporters appear able to post production gains,” he said.

For several months, Opec+ has worked to bring back crude supply that was greatly reduced after the onset of the pandemic in 2020.

The alliance, led by Saudi Arabia and Russia, achieved a historic reduction of 9.7 million bpd between May 2020 and July 2021.

Opec+ has been shepherding oil markets since 2016.

However, a Wall Street Journal report on Tuesday suggested that Opec+ members are exploring the idea of exempting Russia from its deal, perhaps opening the door for other producers with spare capacity to increase oil production.

Russia is the world's largest energy exporter behind Saudi Arabia, accounting for about 10 per cent of the world’s energy output, including 17 per cent of its natural gas and 12 per cent of its oil.

Moscow is facing a tightening net of western sanctions in response to its military operation in Ukraine.

In April, about 1.5 million bpd of Russian output was expected to be shut-in, according to the International Energy Agency.

From May onwards, the agency said it expected about 3 million bpd of Russian production to be offline because of international sanctions and a widening customer-driven embargo.

“The next 36 hours in oil markets are looking rather tasty from a volatility point of view, despite already seeing huge overnight session ranges,” said Jeffrey Halley, senior market analyst for the Asia-Pacific region at Oanda.

“The Opec+ meeting, based on the WSJ article, has now transformed from the monthly business-as-usual event, to a potential structural turning point for oil markets.”

Oil prices retreated on Wednesday on the Russia-Opec+ news. After shooting to above $123 a barrel on Tuesday, Brent, the benchmark for two thirds of the world's oil, was at $117.40 a barrel at 1pm UAE time.

West Texas Intermediate, the gauge that tracks US crude, was trading at $116.50 a barrel.

The Ruhr oil refinery in Gelsenkirchen, Germany. The country plans to stop importing Russian oil by the end of the year. Bloomberg

Brent's ascent on Tuesday was the highest since rising close to $140 in March.

Prices have rallied after the EU agreed to ban most of Russia's oil imports by the end of the year. The partial ban raises concerns about a tighter market amid higher demand expectations in the summer.

“The good news is that the knee-jerk reaction in crude oil to the European ban of Russian oil imports remained capped near the $120 mark,” said Ipek Ozkardeskaya, a senior analyst at Swissquote Bank.

“US crude couldn’t find buyers above the $120 psychological mark, and the latest rally got investors to hurriedly take profit, as a sign that above this level, the concerns about the negative impact on demand take over — despite the news that Shanghai is free after a two-month lockdown.”

China, the world’s second-largest economy and biggest importer of energy, has begun to ease Covid-19 restrictions, which could potentially change demand dynamics.

As the rate of Covid-19 infections continues to decline, China plans to reopen shopping malls and shops from Wednesday in Shanghai, the country’s commercial centre, brightening the prospects for its economy.

The EU ban on Russian energy imports and improving demand prospects linked to China’s economic revival raise questions on supply dynamics in an already tight market, said Naeem Aslam, chief market analyst at Avatrade.

“Supply is a major concern and the fact that the EU is prepared to move away from Russian oil, traders are concerned how the supply-and-demand equation will come to a level under which we could see oil prices back below the $100 price level,” Mr Aslam said.

“For now, it is very much clear that oil prices are likely to remain high for an extended period as Opec+ is [in] no mood to pump extra oil supply.”

Since the beginning of the Ukraine war in February, the Opec+ alliance has maintained that the volatility in oil markets was not being caused by fundamentals and that higher oil prices were a result of geopolitical developments.

“The Opec+ argument that oil markets are currently distorted by geopolitical risks is not wrong,” said Edward Bell, senior director, market economics at Emirates NBD.

“Sanctions from the US, the UK and others on Russian crude and trade in Russian commodities are non-fundamental factors affecting markets, and are not, in and of themselves, endogenous to oil and commodity markets.”

However, they have a material impact on fundamentals with Russian oil output and exports of crude and products declining, he said.

Moving forward, the loss of Russian supply, a move by Opec to maintain production levels and the reopening of China will “likely throw a floor under any sell-off in oil prices, and should keep the downside potential limited”, Ms Ozkardeskaya said.

“The major support to the actual rally is the 50-DMA [day moving average] level, a touch below $107 per barrel.”