OPEC+ higher quotas, SPR releases may compensate for loss of Russian crude: Vitol's Muller

The OPEC+ agreement for higher quotas in July and August and continued release of oil from the US government's Strategic Petroleum Reserve may compensate for the loss of Russian crude, the head of Vitol Asia said, as the European Union undertakes a phased ban on seaborne oil imports from Moscow.

"Crude output of Russia is still level pegging with what it was and it's products that's been hit," Mike Muller told the Gulf Intelligence daily energy podcast on June 5. "Products look continue to be hit but harder and that production shortfall can be made up by OPEC+ accelerated increases plus of course we must not forget that SPR release is ongoing."

OPEC+ ministers agreed on June 2 to increase their quotas by 648,000 b/d for July and another 648,000 b/d for August – about 50% higher than the typical 432,000 b/d monthly raises that it has recently implemented.

Calling the OPEC+ decision "a surprise," Muller said the group responded to pressure from the US and other consumers to boost its output and tame gasoline prices.

"It's just a realization that oil prices remain a little more resilient than some would have forecast, and they are giving a little signal in response to strong requests from the Americans to keep prices under control and not add fuel to fire about escalating costs to Europe," Muller said.

SPR releases

Platts Analytics estimates the latest EU measures will hit nearly 1.9 million b/d of Russian crude imports by the year-end, with about 300,000 b/d still flowing to Hungary, Slovakia and the Czech Republic via pipeline. Another 1.2 million b/d of refined product imports from Russia would cease by the end of the year.

Meanwhile, the US will release 39 million barrels of sour crude and 1.1 million barrels of sweet crude between mid-June and mid-August in the latest round of the largest-ever Strategic Petroleum Reserve drawdown.

The sale will inject 905,000 b/d onto the market from mid-April through October, with additional drawdowns by other International Energy Agency nations raising global SPR flows to about 1.4 million b/d over the same period, according to S&P Global Commodity Insights.

The Biden administration announced the SPR drawdown as it sought to shore up global oil supplies, help Europe curb its dependence on Russian oil imports and ease domestic energy prices contributing to the highest US inflation in 40 years.

OPEC+ spare capacity

With regard to the OPEC+ quota hike, Saudi Arabia and the UAE are expected to be the main countries with enough spare capacity to compensate the shortcomings of other members, Muller said.

"The only way they will be able to put out 648,000 b/d extra month on month is if the slack is taken up by countries that have spare capacity...that's in the hand of Saudis and Emiratis and not too many others," said Muller.

"All eyes will be on whether the Saudis, in particular, will do that. I think they will respond to signals if the price continues to hold above $120/b and push towards $130/b."

Benchmark Dated Brent was assessed on June 1 at $122.96/b, down 1.14% on the day, according to assessments from Platts, part of S&P Global Commodity Insights.

With regard to Iran's nuclear deal, Muller said he doubted the administration of President Joe Biden will be able strike such an agreement and help unleash Iranian crude into the market this year, but he expects Washington to turn a blind eye to Tehran's sale of its sanctions-hit oil ahead of midterm elections in November.

"If the midterms are dominated by the need to keep gas prices low in America, turning somewhat a greater blind eye to the sanction barrels coming out [of Iran] and competing with Russia for that matter, is probably something you must expect to see," Muller said.