OPEC+ Production Strategy To Stay, Oil Market Struggling?

Key Insights

• OPEC+ strategy to continue
• Russian crudes still wanted
• NOPEC bill to be real challenge

Global oil markets are awaiting EU decisions on Russian energy sanctions, which could push up prices again structurally. At the same time, global oil production seems to be struggling, keeping a possible demand-supply crunch in place. First signs given by OPEC+ participants are showing that the oil group is going to stick to its existing production deal.

The existing deal, in place since July 2021, in which the group decided to unwind record output cuts, due to COVID-19 pandemic issues, is slated to bring another 432,000 bpd in the market. Until September 2022 every month OPEC+ is going to increase production at this level. The market has been pushing OPEC+ to increase production even more the last months, not only due to high prices but also because of possible shortages on the supply side.

OPEC+ production struggling

Optimism is weak, as OPEC+ since months has been showing to be struggling to produce to levels as agreed upon. In March OPEC+ members have been 1.45 million bpd below its production targets, as Russian oil exports have been fledgling due to the Ukraine invasion and direct or indirect sanctions. Data shows that Russian oil production could be falling by 17% in 2022, but this could be even too optimistic. The last weeks major oil companies have changed their position towards buying Russian crude oil volumes or petrochemical products.

At the same time, international oil traders are very wary about their Russian exposure in case European energy sanctions would be put in place. Moscow has been hoping on selling its crudes to Asian customers, but even China or India seem to be starting to be less interested. Russian crudes and products are currently on the market at extreme high premiums for buyers, as Moscow is willing to sell against almost any price offered.

Russian crudes still hitting the market

Even that Russia’s oil production is down, and traders struggling to take volumes, overall the market is still there. Russia’s war on the Ukraine is not yet stopping clients to take advantage of the discount on Russian crudes. Data provided by Kpler indicate that Russian seaborne crude exports, excluding CPC flows, have not changed dramatically yet. Kpler indicated that volumes were still at 4.54 million bpd in the month to 20 April, 2022, after a 52,000 bpd fall from February to March.

S&P Global Insights has stated that exports of Russian crude and products even increased by 273,000 bpd month over month in the first three weeks of April. The latter is remarkably after that volumes decreased by 873,000 bpd in March. Main customers, according to the IEA, the energy watchdog of the OECD countries in Paris, are still India, South Korea, and China.

Total Russian exports are hovering 6.79 million bpd as of 20 April, slightly lower than the 7.43 million bpd in February. Russia still has been selling oil products to France, Turkey, Italy and the Netherlands, but these volumes could become under threat if the EU decides to put in place a strict sanctions regime soon. Russia’s main concern in the meantime will be increasing sanctions on its vessels, as the UK, US and Europe have banned Russian-flagged ships from their ports. If put in place really, this could block around 460 vessels internationally.

NOPEC bill could be danger soon

The pressure on OPEC and non-OPEC members such as Russia is however increasing. In a move to hit OPEC further, US Senate members are considering to propose a bill next week to open OPEC and other countries to lawsuits for collusion on oil prices. The bill, which is going to be presented by US Senator Chuck Grassley, a Republican, in cooperation with Senator Amy Klobuchar (D) and others, is slated to be the NOPEC bill. The latter comes at a time that the US Biden Administration is struggling to control oil and gasoline prices in the USA.

As stated by Grassley, the NOPEC bill will give the US Attorney General the option to sue oil-producing countries under anti-trust laws. The US Senate move is a follow up of a similar version which has passed the U.S. House Judiciary Committee last year. Optimism in the US Congress is high that the bill will pass, largely due to Russia’s actions in Ukraine, and the impact of higher crude oil prices on US consumers at present. Some analysts are worried however that the main underlying reason is the fact that OPEC, mainly Saudi Arabia and the UAE, have rebuffed calls by Washington to open up to more production volumes on the market.

Until now, Riyadh and Abu Dhabi have been keeping very strict to the OPEC+ agreement, not showing any real willingness to increase production quicker. One of the underlying reasons for this is the still very icy relationship between the Biden Administration and Saudi Crown Prince Mohammed bin Salman. The current relationship with Abu Dhabi’s Crown Prince Mohammed bin Zayed is also far from warm.

Without a possible rapprochement between Riyadh and Washington no OPEC moves are to be expected soon. Crown Prince Mohammed bin Salman will be waiting for a Biden phone-call before even more crude is expected to hit the market. Until the latter happens, Arab governments will be more looking to China and India for guidance than Washington or Brussels.

Power plays to hit market soon

The coming weeks oil markets will be extremely volatile. Current demand destruction in China, due to COVID restrictions, and high inflation pressures globally, are not pushing back demand extremely yet. At the same time, Russia’s oil exports will become under pressure, not only due to EU sanctions but also based on its lack of storage capacity. A removal of 2-3 million bpd of Russian crude and products could result in an oil price spike. Washington’s move to threaten OPEC+ via a NOPEC bill only will increase volatility, and geopolitical unrest.