Oil producers of the OPEC+ group – consisting of 13 members of the Organization of the Petroleum Exporting Countries and 10 others, including Russia – meet on Wednesday to agree on next steps in their market management. For the first time in a year, there is no clear policy on rubber stamps for them. It can make for an interesting (virtual) gathering.
The oil producing group has now added back all production it agreed to cut in April 2020 – well, in theory – with an August target of the original baseline level.
In practice, the group’s production is lagging far behind, with its members pumping about 2.7 million barrels a day compared to planned in May, the most recent month for which full production figures are available. About half of the shortfall is due to Russia, whose crude and refined products have been abandoned by some European buyers after an invasion of Ukraine in February. Diversion of exports to India has helped Russia avoid the full impact of the procurement sanctions, but it has not been able to fully offset the losses of most of its European market.
OPEC+ is currently facing calls to increase oil production. During his visit to Saudi Arabia earlier this month, US President Joe Biden told the group to pump more to help cushion rising inflation. This week’s meeting will be the first opportunity for all members to discuss that White House request.
If it seriously considers increasing production again – and there’s no guarantee it will – the group can raise everyone’s goals. But it will widen the gap between planned and actual production, given that some countries will be able to pump more than before. In practice, it is only Saudi Arabia and the United Arab Emirates that have significant additional production capacity, and yet there is a question of how much they can make.
Another option would be to allow some OPEC+ members to redistribute unused portion of existing targets to those with excess capacity to make up for the shortfall. This may be a logical approach, but so far the group has shown no appetite to go down this road. Any plan to redistribute unused allowances is likely to be opposed.
But the widening gap between target and actual output undermines OPEC+’s credibility. When prices are rising and their production plans have little resemblance to reality, it is becoming increasingly impossible for the conglomerate to claim a stabilizing oil market.
I don’t think Russia will give up any of its goals, even on a temporary basis, to other members, unless it gets something in return. OPEC countries spent a lot of political capital to bring Moscow into their broader grouping and would require almost anything to keep it there. They are unlikely to end Russia’s production target parity with Saudi Arabia, and would make redistribution of unused portions of other countries’ targets problematic.
And don’t count on Russia to support anything that will drive oil prices down substantially. To persuade refiners in India to process their crude, Russian oil vendors have been forced to offer major discounts. The country’s major Ural export grade traded at a discount of around $35 a barrel against the benchmark Brent crude in April-May. Although it has narrowed recently, the Ural was still trading below Brent in mid-July at $25 a barrel.
This probably rules out major increases in production targets, as Russia does not want oil prices too low. The Kremlin needs to replenish its coffers to pay for its war in Ukraine, and it is certainly missing the pain that high energy prices are antagonizing it.
Still, OPEC’s own analysts reflect a growing need for its crude. The world would need about 30.5 million barrels a day from this small conglomerate during the current quarter to balance supply and demand. This is 1.74 million barrels a day higher than the 13 OPEC countries in June.
Consumers are pulling more than 1 million barrels of crude and refined products out of emergency stockpiles a day, but most of them are due to expire in October. If OPEC does not fill this gap, either prices will rise or demand will decrease. Most likely, one will follow the other.
This will be the first OPEC+ meeting in more than a year without a pre-agreed output plan. This should allow the group to make a fair assessment of what the world really needs from it, but I fear the Kremlin’s heavy hand will stifle any worthwhile effort to bring down global oil prices.
Julian Lee is an oil strategist for Bloomberg First Word
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