Opec Unmoved by Mounting Supply Pressures

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Opec-plus looks unlikely to break ranks and increase production above its current agreement despite a growing list of market concerns that pushed oil prices back over $120 per barrel this week. An outage at the Caspian Pipeline Consortium (CPC) is the latest challenge for the producer group, compounding already high uncertainty over Russian oil flows in the wake of Russia's invasion of Ukraine. Energy Intelligence understands that, for now, there have been no consultations among Opec-plus members on increasing production. The group also looks aligned on Russia’s presence in the alliance remaining crucial. That includes Mideast Gulf states led by Saudi Arabia and the United Arab Emirates, the only members with meaningful spare capacity that could pump more oil in short order. The CPC situation adds a new layer of uncertainty to a market still trying to assess the extent of disruptions to Russian oil flows due to concerns about mounting sanctions on Moscow and buyer fears of reputational damage from handling Russian oil. Sources told Energy Intelligence that Opec-plus members are closely observing the volatile market, where a hefty geopolitical risk premium has been built into prices.

While any formal decision must wait for discussions at the Mar. 31 Opec meeting, delegates told Energy Intelligence that it is highly unlikely that any of the Mideast Gulf states with spare capacity would act on their own to supply more crude. With maintaining group unity still the priority, Opec-plus members have dodged panicked calls from Western nations heavily dependent on Russian oil imports or spooked by spiking prices that are seeking higher production to calm markets. Opec-plus is emphasizing the fluidity of the situation and that the extent of Russian supply disruptions remain unclear despite rampant trader reports of "self sanctioning," unwanted spot cargoes of Russian oil, and cargoes stranded at sea waiting for buyers. And with limited global spare capacity, Gulf states in particular are skeptical that more production would cool prices. Sources point to the International Energy Agency's recent plan for a coordinated release of 60 million barrels from strategic stockpiles, which failed to curb rising prices. After the Mar. 31 meeting, Opec-plus is due to revisit members' quota calculations. It had been agreed previously that five countries, including Russia, Saudi Arabia and the United Arab Emirates would be granted higher baselines starting in May. One senior Opec-plus delegate told Energy Intelligence that the group may decide to have members disclose their true output capacity to set new quotas, which could help address the problem of lower-than-promised volumes to the market going forward. However, the delegate acknowledged this could stir up tensions. Energy Intelligence understands that several members claim higher capacities to ensure a higher slice of market share on paper.

Opec-plus' spare capacity issues have come to the fore as it has been unable to fully deliver the 400,000 barrel per day monthly hikes in supply it has promised since last August. Delegates concede that Opec-plus undersupplied the market by as much as 1.05 million b/d in February, broadly confirming Energy Intelligence estimates. Russian and Caspian losses could increase this shortfall exponentially, with some experts seeing the possibility of prices spiking to $150/bbl or higher in coming months. In the absence of a supply response, demand destruction would be needed to balance the oil market — hardly an appealing option for Opec-plus in the face of the gathering energy transition. Energy Intelligence estimates that Russian crude production in the second quarter will decline by 1.2 million b/d to 8.8 million b/d. Output in the second half of the year will slide further to 8.5 million b/d — but these forecasts are subject to significant revisions depending on the trajectory of the war and sanctions actions. In light of the CPC outage, Energy Intelligence now forecasts that April output by the 19 Opec-plus members with a quota will be 36.7 million b/d, which is 3.3 million b/d below the targeted level for the month. By July, CPC should return to working capacity, but a sustained decline in Russian production means that Opec-plus 19’s output will sink to 36.41 million b/d, an enormous 4.7 million b/d shortfall. Such a gap would suggest the alliance had failed to achieve its main goal of managing the market, while higher prices could threaten the global economy and accelerate societal forces to transition away from oil.

Opec/Opec-Plus, Opec-Plus Supply , Oil Supply, Oil Demand, Crude Oil, Oil Forecasts, Oil Prices
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