Opec-Plus: If It Ain't Broke...

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If it ain't broke, don't fix it.

That simple bit of folk wisdom seems to have become the guiding principle for the Opec-plus alliance's supply management efforts — and understandably so.

Ministers will hold their latest monthly video-link meeting on Thursday to review oil market conditions and make any necessary adjustments to planned production levels.

But in practice these meetings have become a predictable ritual, wrapping up in half an hour or less, with the participants signing off on a previously agreed increase in output with little substantial discussion.

In August of last year, Opec-plus embarked on a series of monthly increases of 400,000 barrels per day in its combined production.

As of this May, those steady monthly increments have been stepped up to around 430,000 b/d and they look set to continue at that level until the alliance's current supply management pact runs its course some time later this year.

Geopolitical Premium

Crude oil prices, meanwhile, continue to hover above $100 per barrel, which is well above the comfort level of most consumer nations.

However, while high prices are likely to erode demand in the longer term, they have provided a welcome boost to producer nations' finances after several years in which oil prices were lower than most of them would have hoped to see.

The International Monetary Fund says the six members of the Gulf Cooperation Council — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates — are on track to post combined fiscal surpluses in 2022 and 2023 after three years of deficits.

An Opec-plus source told Energy Intelligence that geopolitics — most notably Russia's war in Ukraine — is the main cause of current high prices rather than a physical shortage of crude oil.

Members of the alliance say that this argument is backed up by the muted price response to plans by the US and its allies to release large volumes of oil into the market from their strategic petroleum reserves.

It therefore makes little sense for Opec-plus to diverge from a plan that revived oil prices by slashing supply when demand and prices collapsed because of the Covid-19 pandemic and then gradually increased supply according to a transparent schedule.

With only five more months for the current agreement to run, according to the original schedule, it's easy to see why Opec-plus would prefer not to tamper with it.

Nevertheless, the 23 members of the alliance are likely to face some tough negotiations further down the road about working together on supply management.

Revisiting Quotas

Opec and non-Opec producers signed a cooperation agreement at the end of 2016, predating their current deal on production cuts by more than three years.

And leading members of the alliance have made clear that they want cooperation on supply management to continue after the big production cuts implemented in 2020 have been completely reversed.

In particular, Opec's de facto leader Saudi Arabia is keen to preserve the unity of the alliance and maintain cooperation with non-Opec giant Russia, a fundamental fact that has not been affected by the war in Ukraine.

Nevertheless, a senior Opec-plus delegate told Energy Intelligence that there will have to be an honest conversation among the members at some point about basing future production quotas on how much each member can really produce.

Several members of the alliance have fallen short of their production targets in recent months — a group that now includes Russia.

Saudi Arabia and the UAE, meanwhile, are the only members with significant spare production capacity and credible plans to increase it.

For the time being, however, the current plan appears to be working to the satisfaction of the alliance's members and nobody wants to rock the boat.

Oil Supply, Opec/Opec-Plus
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