OPEC+ set to stay the course as it awaits clarity on Russia shut-ins, China lockdowns

Dated Brent prices in April vacillated between $98/b-$108/b, as traders struggled to weigh the evolving western sanctions on Russia against weakening oil demand in China, where the coronavirus is resurgent.

For OPEC and its Russia-led allies, however, there is no wavering in their conviction on how to manage crude supply.

Several delegates say the OPEC+ coalition is likely to rubber stamp another modest 432,000 b/d increase in production quotas for June, when ministers meet May 5, sticking with a plan agreed last summer.

"We are not currently seeing strong demand and supply tensions that would lead OPEC+ to change its supply policy," one delegate said, asking not to be named to discuss private deliberations. "For the moment, we do not have clear visibility on the impact of the confinements in China on oil demand and on Russian production."

Another said that there were "no concerns about prices," while a third said any blow to Chinese oil consumption may not become apparent until the second half of 2022.

The 23-country OPEC+ alliance has steadfastly maintained its gradual unwinding of its record pandemic-induced production cuts, shrugging off intense lobbying from major consuming nations, such as the US, India and Japan, for more aggressive increases to cool off high prices and tamp down rampant inflation.

Global oil demand has been rising as much of the world looks to move beyond the pandemic, but OPEC+ countries themselves have also contributed to tightened market balances on the supply side, with several members consistently underproducing their quotas, due to internal disruptions and underinvestment.

Those internal dynamics make it highly improbable that the alliance will fulfill another 432,000 b/d quota hike. For March, the last month for which full production data is available, the coalition fell a record 1.45 million b/d short of its quotas, according to internal OPEC+ analysis seen by S&P Global Commodity Insights.

Standing with Russia

The few OPEC+ members with spare production capacity, primarily Saudi Arabia and the UAE, could ease some – though not all – of those supply crunches, but have declined to pump beyond their quotas, maintaining solidarity with ally Russia while blaming market volatility on geopolitics that they have nothing to do with.

S&P Global forecasts that OPEC+ spare capacity will shrink to 1.6 million b/d by July.

"With negligible spare capacity elsewhere in the world by Q3 2022, geopolitical uncertainty will create even more bullish supply-side scenarios," S&P Global analysts Paul Sheldon and Nareeka Ahir said in a note.

Western sanctions have caused many traders to halt transacting in Russian commodities, though OPEC+ delegates are quick to note that Russia's oil exports have largely held up so far, with market sources saying that extreme discounts have attracted opportunistic buyers in India and other Asian markets.

Still, a potential EU ban on Russian oil and additional sanctions are expected to shut in some 2.8 million b/d of production in May, S&P Global estimates.

"Oil markets are likely to remain pressurized as Russian crude oil production declines sharply over the coming months," analysts with Riyadh-based Jadwa Investment said in a note. "This will add to major concerns over OPEC+'s ability to raise output to targeted levels, which had already been in question prior to the outbreak of Russian-Ukrainian conflict."

Meanwhile, outages in Libya, where protesters have blockaded ports and oil fields, put about 370,000 b/d of production and 230,000 b/d of recent crude exports on force majeure.

Recession risks

The core Gulf members' reluctance to offset the fallout from the Russia-Ukraine war has contributed to deteriorating relations between Saudi Arabia and the US, where lawmakers are deliberating another so-called NOPEC bill that would allow lawsuits against the producer bloc for violating antitrust regulations.

The US is also leading an International Energy Agency-coordinated release of 240 million barrels from strategic oil stocks, which will be hitting the market over the next five months.

On the demand side, China's COVID-19 outbreak and resulting lockdowns have seen Dated Brent retreat from 14-year highs of more than $137/b in early March, though consuming countries are hoping for more relief.

Record inflation in many key economies and soaring energy costs, including record diesel prices, are prompting warnings about recessions that would put an abrupt brake on the pandemic recovery.

OPEC+ delegates on a Saudi-Russian co-chaired technical committee will review oil market forecasts on May 4, a day before ministers convene for their full conference.

Ministers have not held a post-meeting news conference since November, only issuing brief communiques – the last of which said after the March 31 meeting that "the consensus on the outlook pointed to a well-balanced market."

With another 432,000 b/d increase largely expected, delegates say they remain confident in the alliance's grip on the market but are aware that conditions could rapidly change.

"We must remain vigilant," a delegate said.