Opec-Plus Shrugs Off Growing Supply Fears

Opec-plus this week refused to bow to Western pressure to increase oil supplies and cool off prices, which have skyrocketed on the back of Russia's war in Ukraine. Shrugging off mounting fears of supply shortages, ministers chose to keep existing policy largely unchanged, insisting the market remains "well-balanced." Ensuring the continued presence of Russia, which is by far the largest non-Opec producer in the alliance, remains a top priority. Thursday's meeting saw monthly production increments nudged up by just 32,000 b/d in May from 400,000 b/d now, which was the result of a compromise reached last summer, when five members of the group were granted higher production baselines. At the time, it was also agreed that the group would gradually return 5.76 million b/d of production to the market over a 14-month period, which ends when the current pact expires in September. The 432,000 b/d increment would be redistributed among the group’s members according to the new baselines from which their targets are calculated. This means that from May, Saudi Arabia and the United Arab Emirates will have production quotas of 10.549 million b/d and 3.04 million b/d, respectively. The small change should see additional barrels coming to the market from these two states, the only ones in the group with any significant spare capacity. Industry sources estimate that, with their new quotas, they have around 2 million b/d spare. But Russia stands little chance of hitting its May target — the same as Saudi Arabia's — after falling around 150,000 b/d short in February and facing export challenges. Others granted a higher baseline, notably Iraq, will also struggle.

The West's deteriorating trust in Opec-plus' market management has led the US administration to take matters into its own hands, announcing a record release from its Strategic Petroleum Reserves shortly after the Opec-plus meeting wrapped up. The White House said the US would add 1 million b/d from storage over the next six months. But many remain deeply skeptical about the effect on the market that such a release will have. It is the second this year, after the US committed to supplying half of the 60 million bbl that International Energy Agency (IEA) member nations agreed to release a month ago. Oil prices spiked following that Mar. 1 announcement, as traders assessed that inventory releases would not address the structural supply deficit facing oil markets. In remarks this week, the UAE’s Oil Minister Suhail al-Mazrouei said the US and its allies should place more trust in the supply management efforts of Gulf Arab oil producers. "We need understanding that what we do is for the benefit of consumers worldwide. We are trying to balance the market. And we know from experience what is the right way. So trust us," he said. At a government summit in Dubai this week, Saudi Energy Minister Prince Abdulaziz bin Salman and the UAE's al-Mazrouei both emphasized the importance of maintaining Opec-plus unity and keeping Russia in the fold. In its 62-year history, Opec members have fought wars with each other that did not cause the organization to collapse, and the Gulf states argue that, even now, they are able to cooperate on oil market management with Iran, which some see as their regional archenemy. “When it comes to Opec-plus, everyone leaves politics outside the door,” said Prince Abdulaziz at the summit. “We managed to compartmentalize our political differences from what is for the common good of all of us.”

Opec's Joint Technical Committee, in a surprise move on Wednesday, decided to ditch the IEA as a secondary source used to assess the group's crude production each month. It has been replaced by Wood Mackenzie and Rystad Energy. "The reason is because the IEA have compromised their technical analysis to fit their narrative. This is evident when observing the frequent changes in their recent reports and how far they deviate from other respected agencies," said a source familiar with the matter. The IEA's chief Fatih Birol recently said he was "really disappointed" by Opec-plus producers' lack of a sense of urgency in the current tight market, noting that the global market faced an estimated 2.5 million b/d supply shortfall. Even assuming no Russian supply disruptions, Opec-plus' base-case still projects OECD commercial stocks will be 109 million bbl below their 2015-19 average by year's end, keeping upward pressure on prices.