LAUNCESTON — OPEC and its allies have kicked the crude oil can down the road in sticking to their plan for modest monthly output increases.
OPEC+, which consists of the Organization of Petroleum Exporting Countries (OPEC) and other producers including Russia, agreed at their meeting on Thursday to raise output by about 432,000 barrels per day (bpd) in May.
This is up slightly from the prior monthly increases of 400,000 bpd. But the gain merely reflects changes in how the group calculates the baseline for its output.
While oil-importing nations are likely to be disappointed that OPEC+ didn’t do more to ease pressure on crude prices, perhaps the most sensible move was to stick to the agreed pathway and wait and see how things unfold in this age of war and pandemic.
In normal times, crude oil is subject to a variety of competing influences, and working to balance demand and supply at a price acceptable to both producers and consumers is a considerable challenge, to put it mildly.
But these are no ordinary times, and the range of factors shaping the market carry high degrees of uncertainty.
Among the balls in the air are U.S. President Joe Biden’s decision to release 180 million barrels from the strategic petroleum reserve (SPR).
Then there’s the as-yet unquantified, but potentially very significant, loss of Russian crude and products from global markets, not forgetting the impact of coronavirus lockdowns in top crude importer China.
To that mix, throw in OPEC+’s consistent failure to actually get output to reach stated targets, then stir with anecdotal reports from physical traders that the crude market is nowhere near as tight as the paper trade implies – and what you have is a cocktail of contradictory information.
In theory, the U.S. release should be bearish for prices, but it’s not quite that simple.
There is a question as to whether the U.S. SPR can actually physically supply 1 million bpd every day for six months, with some analysts suggesting that figure is above its maximum output levels.
Even if the volume is achievable, it also will reduce the SPR to around 300 million barrels. As RBC Capital Markets pointed out in a research note, that is very close to the 315 million barrels the United States should hold in order to meet the 90 days of net import cover mandated by the International Energy Agency.
This likely means that once this latest release is delivered, there are “no further SPR bullets,” as RBC put it, which may end up being a bullish signal.
What happens to Russia’s oil and product exports in the wake of the ongoing crisis created by the invasion of Ukraine is a further uncertainty.
While energy exports are exempted from Western sanctions against Moscow, it’s clear that self-sanctioning will at the very least disrupt flows, with European refiners in particular scrambling to find alternatives.
Russia, which calls its actions in Ukraine a “special operation,” supplies up to 5 million bpd of crude and about 2 million bpd of products, mainly to buyers in Europe and Asia. The full impacts of self-sanctioning, difficulties with payments, insurance and shipping are likely only to become evident from April onwards.
Russia’s crude exports appear to have been steady in March, with data consultants Kpler estimating shipments of 4.45 million bpd, slightly down from February’s 4.6 million bpd.
But there are already signs that the flows are realigning. Europe took 2.06 million bpd in March, down from February’s 2.97 million bpd, while Asia imported 1.84 million bpd in March, up from February’s 1.39 million bpd.
China also presents uncertainty, with the ongoing COVID lockdowns in several major cities likely to hit fuel demand and growth in the world’s second-biggest economy.
While China’s crude oil imports may remain steady, it could affect the global product balance with China now likely to allow exports of refined fuels if domestic consumption drops.
To further complicate matters, there are other geopolitical dynamics at play: the possibility of a new nuclear deal with Iran; the return of Venezuela to oil markets; and tensions between the United States and erstwhile ally Saudi Arabia.
Much of the commentary on U.S.-Saudi tensions gives the whip hand to the Middle East kingdom given it controls significant spare crude capacity.
But that ignores other commodities, such as wheat and corn, the global supply of which will no doubt be impacted by the Russian invasion of Ukraine, with both countries being major exporters of the grain staples.
If the Saudis, who are highly dependent on food imports, have to turn to other suppliers, then the advantage swings back to the United States, given it is one of the few remaining sizeable exporters of grains.
The overall impact of all these influences will play out in coming weeks, making OPEC+’s decision to stick to the agreed plan a safe play.
But eventually the group will run of road and have to decide whether the high prices currently being enjoyed are worth the inevitable global recession that will follow.
GRAPHIC-Strategic Petroleum Reserve of the United States: https://tmsnrt.rs/3739OW3
(Editing by Kenneth Maxwell)