OPEC+ set to meet ahead of Biden's Saudi trip, as production accord nears its end

The OPEC+ alliance has its production quotas in place for August, but what happens next remains a vital question for an oil market contending with sanctions on Russia and rampant inflation.

Months of pressure from the US and other consuming nations on OPEC and its partners to increase their crude production could soon be coming to a head, with President Joe Biden set to make a critical trip to Saudi Arabia in mid-July in a major test for petrodiplomacy.

Biden will be seeking commitments by Saudi Arabia and its Gulf allies to continue raising output through the end of the year to address high oil prices, but that would require buy-in from the rest of the OPEC+ countries -- a dicey proposition with Russia a key member.

How much spare capacity Saudi Arabia and others actually hold -- and how much they would be willing to use -- is another uncertainty.

"Biden's trip is well-timed if they want to discuss what happens after the OPEC+ deal expires as of end-August," said Matt Reed, vice president of Saudi-focused consultancy Foreign Reports. "The seriousness of this conversation really depends on where the market is in a few weeks' time. Even then it can't be as simple as a quid pro quo. The Saudis have to believe that the market needs that oil. That's far from certain when everyone is increasingly nervous about a recession."

But first, OPEC+ ministers will meet June 30. Though they are only expected to reaffirm plans to restore output to pre-pandemic levels in August without making any decisions beyond that, their discussions could lay the groundwork for a new production accord when they convene again a few weeks after Biden's trip.

A ratcheting of western sanctions on Russian oil flows, including the EU's ban on most imports by the end of the year, is expected to tighten global supplies, as demand has picked up with the summer driving season in the northern hemisphere. But widening concerns over a global recession have weighed on the market, contributing to volatile prices in recent weeks.

The Platts Dated Brent benchmark was assessed at $120.65/b on June 27, after having risen as high as $132.06/b on June 14, data by S&P Global Commodity Insights showed.

OPEC+ delegates are so far keeping their cards close to their chests, citing the challenges of a rapidly shifting market. Russian crude exports have remained resilient in the face of sanctions so far, but many analysts expect them to eventually tumble, while disruptions have hit Libya, Kazakhstan, Nigeria and other key producers in the past few months.

Iran nuclear deal talks also remain alive, despite months of no progress, with European officials making a renewed push for an agreement that could unlock significant volumes of Iranian oil sales.

"With today's environment, conditions are changing every day," one Gulf delegate told S&P Global. "So much is up in the air."

Shrinking buffers

Officially, the OPEC+ deal keeps the August quotas in place through the end of 2022, and any changes would require unanimous approval by all 23 members of the alliance.

A delegate-level technical committee will hold virtual talks June 29 to review market conditions, followed by an OPEC ministerial meeting that officials said would be largely administrative.

Then on June 30, a Saudi-Russian co-chaired OPEC+ ministerial monitoring committee, consisting of nine countries, will determine any recommended policy changes, which will be put before the full OPEC+ coalition for a vote when it convenes later in the day.

Much of the focus will be on Saudi Arabia and the UAE, since only they have any significant spare production capacity left, much of it largely untested.

Platts Analytics estimates that by September, Saudi Arabia will have just 460,000 b/d of sustainable upside remaining, while the UAE will be able to raise output by 660,000 b/d.

Exhausting it all would help meet expected heightened demand during the summer, but leave precariously little buffer to respond to any global supply outages, whether due to war, civil unrest as in Libya, or hurricanes in the Gulf of Mexico.

OPEC+ officials have insisted that their decisions will be motivated by their assessment of market conditions, though Biden's trip to Saudi Arabia, where he will also meet with other Gulf officials, inserts a political element.

Saudi Arabia and the UAE, in particular, have been pressuring the US to beef up security in the region, following several attacks attributed to Iranian-backed Yemeni Houthi rebels on key oil infrastructure in their countries.

An OPEC+ report seen by S&P Global forecasts an overall global oil oversupply of 1.0 million b/d for 2022, indicating no further production increases beyond August are needed, though it assumes all members fulfill their upcoming quotas, which is an unlikely prospect given that many countries have not come close to hitting their output targets in a while.

The report, prepared for delegates and ministers each month before the OPEC+ meeting, guides the talks but does not necessarily dictate any policy outcomes.

"It's all about the market fundamentals," the Gulf delegate said. "It's a group assessment, [but] each individual country has its own assessment of demand from its customers and impressions on how the market is doing."