Why OPEC+’s quota boost has no pull on prices

Sopuruchi Onwuka

The decision by world petroleum market factor, the Organization of Petroleum Exporting Countries (OPEC) to boost nominal production by 648,000 barrels per day addressed the concerns of industrial economies but failed to shot down prices.

Market sources on Friday posted increase in the Brent crude price by $1.76, or 1.5 percent, to $119.37 a barrel by 1338 GMT.  The U.S. West Texas Intermediate (WTI) crude also jumped by $1.70, or 1.3 percent, to $118.57.

Analysts point out that oil price gain would likely continue as demand pressure continues to mount on the market from economic growth movements in the United States and China.

U.S. data showed employment increased more than expected in May, signs of a tight labor market; and weekly oil inventory report showed crude stockpiles fell by a more-than-expected 5.1 million barrels. Refined products also showed strong demand side as petrol inventories dropped.

Oil demand is also rising in China’s financial hub Shanghai and capital, Beijing, where the government has relaxed COVID-19 restrictions and declared plans to stimulate the economy.

With the rising demand outlook, OPEC and other producers decided to also relax production restrictions to allow greater volumes of oil to flow into the market.

The Oracle Today reports that despite restating its decision to maintain its original schedule to gradually grow output by monthly installments of about 400,000 barrels per day, the 14 member OPEC plus its 10 country non-member associates in the 24 member OPEC+ agreed in its latest meeting to raise output by 648,000 barrels per day.

The increase came after nations of the European Union expanded their trade sanctions on Russia to oil, sparking some retaliatory gas supply cut to key industrial economies of the bloc.

Russia is under increasing global trade sanctions for invading Ukraine and seizing swathes of its territories in a war that has brought it very close to confrontation with Western economic and military allies. North American and European countries have in response to the war severed trade and diplomatic ties with Russia which leads the non member segment of the OPEC+ coalition.

The partial oil sanctions on Russian oil imply transfer of responsibility on other producers to plug supply gaps in the market where Russia hitherto occupied space for over 7.0 million barrels per day.

In response to the emerging market developments, OPEC and its collaborators altered existing incremental production rate and removed further ceilings that would permit members increase exports.  

However, whereas the increase addressed growing call for greater supply volumes to the market, it has failed to arrest rising prices; indicating persisting tightness in the market as Russia still remains in the OPEC+ output calculations.

Secretary General of OPEC, HE Dr Mohammed Barkindo, had during the CERAWEEK conference in the United States warned that the group does not have enough spare capacity to replace Russian supplies.

The persistent strength of oil in the global markets amplifies Dr Barkindo’s repeated assertions that OPEC+ has no control over non-fundamental factors that affect market forces and drive price movements.

The Saudi Arabian Energy Minister, Abdulaziz bin Salman, had in response to calls on OPEC to hike output also declared that quota output might not directly translate to quick wins in terms of supply surge and expected pull on prices.

In corroborating Dr Barkindo’s statements on supply and prices, bin Salman had pointed at “physical impediments that no producer can solve.”

Both Dr Barkindo and Mr bin Salman infer strongly that Russian supply remains critical to the performance of OPEC+ in achieving balance in the market.

Apart from being a member of the OPEC+ coalition, Russia is a global oil factor, ranking the third after the United States and Saudi Arabia in terms of oil production volumes. It is also the world’s leading pipeline gas supplier.

And sanctions on Russian oil from the demand side of the market, The Oracle Today reports, drains the cumulative strength of the block in keeping the market liquid. Other members of the producers’ bloc are medium and small scale exporters with limited shares of the market.

President of Washington-based consultant Rapidan Energy Group, Bob McNally, is quoted in a reports as expressing confidence that the modest increase by OPEC+ would still reserve some capacity in the event of tighter supplies as Russia comes under increasing trade sanctions.

He said the increased quotas satisfy OPEC, Russia and the US government.

However, an analyst at JPMorgan Chase Bank, Natasha Kaneva, declared in a note made available to the media that the new increase in OPEC+ quotas for July and August would be insufficient to offset expected surge in demand. He pointed at possible downsides in supply as enhanced risk of market imbalance.

Messrs Damien Courvalin and Callum Bruce of Goldman Sachs Group Incorporated stated in a different note that the OPEC+ decision translates to actual increase by 200,000 physical barrels per day.

They pointed out that Russia which under oil sanction remains in the quota and many members of the producers’ bloc still unable to meet their quota in the face of expected demand surge in the demerging summer season.

Goldman Sachs added the risk of slow progress on Iran’s negotiations on its nuclear programme and associated hopes of lifting its oil embargoes.

For Warren Patterson of the ING Groep NV dismissed the OPEC+ quota increase as unrealistic, pointing at the group’s waning spare capacity and sanctions on Russian oil.

In reacting to the oil market outlook after the OPEC+ meeting, Citigroup Incorporated calculated that the oil producers’ group could indeed increase output by only about 132,000 barrels per day from Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq.

The company’s analysts, Messrs Eric Lee and Francesco Martoccia listed three key demand drivers to include Russian oil sanctions, ease of Chinese lockdowns and the approaching US summer driving season.

The Chairman of FGE, Fereidun Fesharaki, stated that it would be unreasonable to expect OPEC to unleash millions of barrels to take care of the self-sanctioning of Russian oil by many buyers, explaining that there wouldn’t have been any extra capacity when demand increases in one to two months from now.

All corporate analysts posted average oil price outlook of about $120 per barrels for the second half of the year, unless there is progress in the Iranian nuclear deal to enable it significantly boost supplies and help tame prices.

Despite all the doubts, the US government sees the quota increase by OPEC+ as a welcome development in the face of the prevailing high prices. White House press secretary Karin Jean-Pierre said in a statement Thursday the U.S. “welcomes” the quota raise by OPEC+.

“This announcement accelerates the end of the current quota arrangement that has been in place since July of last year and brings forward the monthly production increase that was previously planned to take place in September,” she said.