Briefing: Opec-Plus Poised to Enter New Phase

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Abdulaziz bin Salman, Alexander Novak, Mohammed Barkindo

With the unwinding of Opec-plus production cuts due to be completed on Aug. 31, attention is turning to the direction the alliance will move in during the remaining months of this year and into 2023. Energy Intelligence takes a look below at some of the key questions facing the alliance ahead of its next ministerial meeting on Jun. 30.

What can we expect from the upcoming Opec-plus meeting?

In the words of the Opec Secretariat, the global economy is still "fraught with uncertainty" this year, with geopolitical developments and pandemic-related risks clouding the outlook for the oil market.

An accelerated timetable agreed at the alliance's last ministerial meeting means that sweeping Opec-plus production cuts agreed two years ago will now be fully reversed at the end of August — a month earlier than previously planned.

Against this backdrop, officials are still working out what the alliance's future policy should look like from September. Energy Intelligence understands that for the time being, there are no well-defined proposals on the table.

In its latest Monthly Oil Market Report, Opec predicted that global demand would remain at healthy levels in the second half of 2022.

In early June this led Opec and its non-Opec partners to speed up the reversal of their big 2020 production cuts to help stabilize the market.

One key question is whether the much-anticipated visit of US President Joe Biden to Saudi Arabia on Jul. 15-16 will factor into the alliance's decision-making process.

Ties between Riyadh and Washington cooled when Biden took office in 2021. Later pleas from the US for the Saudis and other Mideast Gulf producers to increase oil output were rebuffed, even as the war in Ukraine drove prices higher. But the visit could signal the start of a thaw in relations.

Riyadh might want to postpone any substantive Opec-plus policy discussions until after Biden's visit so the alliance can incorporate any takeaways from the US-Saudi talks into its decision-making. This could mean that discussion of any plans for further increases in output would have to be pushed to the ministers' following monthly meeting, likely to be held in late July or early August.

One important issue the alliance needs to address sooner or later is members' production baselines. Many members have struggled to meet their quotas and their baselines no longer accurately indicate what they are really capable of producing.

In the past, one approach that was tried by Opec was the introduction of a collective production ceiling, without quotas for individual members. However, concerns about protecting market share — even if that is a largely theoretical concept in some cases — may require a more nuanced system.

How will President Biden's visit to Riyadh affect things?

During his visit to the Middle East, Biden will meet with King Salman and Crown Prince Mohammed bin Salman. Their talks will focus on a broad range of issues including regional security, oil prices and energy policy.

During the last Opec-plus meeting, the Saudis and their partners in the alliance extended an olive branch to consumer countries, including the US, by agreeing to complete the unwinding of their production cuts one month earlier. This delivered a modest short-term increase in production and potentially opened the door to further increases sooner.

Energy Intelligence understands that US officials are aware that the limited spare production capacity held by Saudi Arabia and the United Arab Emirates — the only producers with meaningful spare capacity — will need to be managed carefully.

However, there is still an expectation among US officials that the Biden visit should result in another Saudi goodwill gesture to help address supply concerns. For Riyadh, however, any move to alter supply policy must be supported by market fundamentals.

Would higher output have much of an impact on prices?

Many technocrats believe that if both Saudi Arabia and the UAE use up all of their spare capacity, it could spook the market by eliminating the world's emergency supply cushion while failing to lower prices. Prices could remain high for some time as a consequence of years of underinvestment in the upstream and downstream sectors.

Many Gulf officials have stressed that a shortage of refining capacity will prevent gasoline prices from falling, even if they decided to increase crude production. Put simply, a shortage of products cannot be solved by producing more crude.

Adding supplies by drawing down stocks — as the US and other consumer nations have already done this year — failed to deliver a sustained reduction in prices.

What are the main priorities for Opec-plus?

Keeping Opec-plus together remains a top priority for the group and in particular for Saudi Arabia, which believes that future market management efforts will require a broad alliance of producers, including Russia.

Keeping Moscow committed requires walking a fine line between addressing consumers' concerns and avoiding friction within the alliance.

Saudi Energy Minister Prince Abdulaziz bin Salman's meeting with Russian Deputy Prime Minister Alexander Novak in St. Petersburg last week reflected that dynamic.

The prince told reporters at the International Economic Forum in the Russian city that relations between the two countries were "as warm as the weather in Riyadh."

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