OPEC+ looks to a future with Russia beyond pandemic oil production cuts

Reflexes

Current OPEC+ supply deal ends in September

Quotas will have to be renegotiated, with credibility at stake

Ministers will meet on June 2 to set production goals for July

In September, OPEC’s oil production cuts with Russia and nine other allies are scheduled to be lifted entirely, returning the group’s production targets to pre-pandemic levels.

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The market management pact officially continues through December and by all accounts the coalition is eager to continue their partnership, enjoying the windfall of higher oil prices and gearing up together in the fight to stay relevant during the crisis. energy transition.

But how the alliance will look and operate remains to be determined, with oil flows still adjusting to the war between Russia and Ukraine and a lack of investment hampering efforts to revive production in many countries, including several OPEC+ members. .

Only one thing seems certain: Russia, as the world’s third largest oil producer, will continue to play a central role, even as it has been made a Western pariah by its invasion of Ukraine.

Informal discussions are already starting to filter down over the future of OPEC+, delegates say, and formal talks are likely to pick up in the coming weeks.

“Under OPEC+, surely Russia will be involved,” one told S&P Global Commodity Insights, with three others echoing the sentiments.

In the meantime, delegates say they expect the group to stay on its path of phasing out its production cuts in monthly increments of 432,000 b/d, as long as prices remain relatively firm, including at its next meeting on June 2, when dues for July to be finalized.

OPEC+ officials have insisted the oil market remains balanced, with no signs of a crude shortage, despite healthy global demand and sanctions hitting Russian production. Instead, they have blamed high gasoline and diesel prices on a lack of refinery capacity around the world, along with geopolitics.

Dated Brent hit a two-month high of $119.67/b on May 27, as refined product prices in many world regions hit record highs, according to assessments by Platts, part of S&P Global.

“Market conditions continue to cry out for additional supplies, but as long as OPEC+ maintains its focus on ‘fundamentals,’ we expect oil prices to continue to trade considerably tight, meaning high and volatile prices will persist,” said Edward Bell, senior director of market economics at Dubai-based Emirates NBD bank.

OPEC+ credibility

However, in the future, the quotas will have to be changed, or even eliminated, as many countries have already reached the maximum of what they can pump and Russia admits that its production could fall by 8% due to Western sanctions.

The group fell a combined 2.6 million b/d short of its production targets in April, according to its own analysis seen by S&P Global.

The shortcomings have dented the alliance’s credibility as turnaround producers, something the next OPEC+ supply deal will need to address, said Kamil al-Harami, an independent oil analyst based in Kuwait.

“OPEC+ is not reliable and is not fulfilling its commitment to supply the oil market,” he said. “They promise a monthly increase, but they didn’t achieve their goals over the past year. Where is their dedication to oil market stability?”

S&P Global forecasts OPEC+ crude demand to be 2 million b/d above what the alliance is expected to pump in the third quarter of 2022 and 1.2 million b/d above the fourth. quarter, before lower seasonal demand and production growth. from outside the group puts the call below estimated production in the first quarter of 2023.

But a potential revival of the Iran nuclear deal, the scope and enforcement of a still pending EU ban on Russian oil, the possibility of more variants of COVID-19, and the response of global oil demand to high prices Sustained are some of the factors that OPEC+ ministers must weigh.


Sanctions on Russia may even prompt Moscow to seek a waiver from quotas, as Iran and Venezuela, other sanctioned members, have currently done, some delegates have suggested, though they say no such request has been made.

A Russia without quotas, whose production in April fell by 900,000 b/d, according to the latest Platts OPEC+ survey, may be of little use to the group in terms of managing the market, but its weight makes it a partner that OPEC leaders OPEC+ will want. to keep in the fold.

market influence

Quota negotiations are often a tense exercise, with countries unwilling to highlight any limitations on their production capacity, or cede any market share to rivals, either inside or outside the alliance.

Saudi Arabia and the United Arab Emirates, the two members that hold almost all of the world’s spare production capacity, appear to be gaining more influence. Both are investing heavily in upstream expansions, fueled by stronger budgets and leaders motivated to tap into their relatively low-cost reserves.

But its refusal so far to breach its quotas to deflate rising prices has left consuming countries, led by the US, adrift on their strategic reserves.

The G7 group of developed economies has called on oil and gas producing nations, including OPEC, to “act responsibly and respond to tighter international markets…to ensure a stable and sustainable global energy supply.”

How OPEC organizes its continued relationship with Russia will determine the formidable role it will play in managing the future market.


Update: Clarifies that OPEC+ agreement extends until December

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