Of late, war-ridden Russia in reaction to Western sanctions has decreased its oil production by 5%, or around 500,000 barrels a day – thereby raising oil prices in international market to just above $85 a barrel.
Back in October last, OPEC+ lowered its production by 2 million barrels a day, the lowest since April 2020. At that time, OPEC+, of which Russia is a member, stated that the move was based solely on ‘economic factors’ to support oil market stability.
As is known, OPEC+ consists of 13 members of the Organization of Petroleum Exporting Countries (OPEC) and 10 non-OPEC members. The forum regulates the oil supply and also influences the commodity prices in the global market.
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Brent crude, the global oil benchmark had dropped to $75 a barrel from $95 in the fourth quarter due to slow Chinese demand and high oil exports from sanctioned Russia and Iran. For OPEC+ authorities, the 20% decline supports their cautious stance.
As Russia is a member of OPEC+, the global crisis for Russia-Ukraine war has affected the oil market. Russia’s crude oil and petroleum product exports have been banned by the EU and US. Russian oil prices have decreased, but Moscow is exporting more of it to China and India.
Although the OPEC+ oil cartel has a strategy for 2023, the technical council of the oil producers’ coalition has not suggested changing the group’s production policy, which may exacerbate inflationary concerns.
Certainty or a gamble?
It’s easy to think that what worked in 2022 will also work this year as well. But, OPEC+ risks raising energy costs in a world with high inflation if its supply and demand forecasts are inaccurate. Brent prices have already increased from their lows in December.
OPEC and OPEC+ do not disclose oil price forecasts or have a price target. OPEC and OPEC+ ministers and officials frequently avoid discussing the trajectory of prices in open forums. In rare public remarks on February 8, Iran’s national representative to OPEC, Afshin Javan, stated that oil prices may rebound to about $100 in the second half of the year and that OPEC+ is likely to maintain its current output policy at its upcoming meeting.
Oil prices have fallen below $100 a barrel amidst the OPEC+ production curb in October. OPEC+ would prefer add too few barrels than too many for the first half of the year and likely all of 2023. The committee has agreed not to backfill the Russian cut as a swift action. Middle East officials claim that it isn’t unusual for an OPEC+ country to act on its own. For example, Saudi Arabia, the UAE, and Kuwait all cut production on their own in June 2020, and Riyadh did it again in February 2021. Oil partners argue that Russia has the right to act as western oil sanctions are resented by OPEC+.
If the conservative strategy raises oil prices to $90-$100 a barrel later this year, the group seems content. Protecting oil revenues is a concern, especially in Saudi Arabia and rest comes after the kingdom for the nation. Beyond the oil market, the cautious strategy has importance. Energy prices may be higher than anticipated if the cartel lags behind the demand curve, which would surprise central banks attempting to limit inflation. That could lead to higher interest rates, which could affect bonds, stocks, and even real estate in countries.
Officials right now plan to maintain output for oil. Consumer nations haven’t complained about $85 Brent crude. If oil prices rise above $90 per barrel, the pressure on the group will intensify. The United States and Europe would be alarmed if Brent prices rose by another 10%, bringing them near to $100.
OPEC+ officials privately concede that the world economy is in better condition than four months ago, when they reduced production in anticipation of a demand decrease. The IMF now expects a 2.9% growth this year, up from a prediction of 2.7% in October. Inflation appears to have peaked as well, and central banks are gaining confidence that they can achieve a so-called soft landing.
Reopening of Chinese economy and OPEC’s prediction
Four months ago, nobody predicted that China would reopen so quickly. The Beijing metro saw 1.1 million riders last week, the most in almost a year. According to officials, national oil corporations in the Middle East are also experiencing an increase in demand from China as well.
The physical oil sector is also seeing early signs of improvement. In early February, for instance, Saudi Aramco, the state-owned oil company, increased its formal sale prices for Asia for the first time in 6 months. The oil-price curve also shows a strengthening market, with nearby oil contracts trading at a higher premium to contracts for delayed delivery than four months earlier. The second-to-third front month Brent crude spread is at its core point in three months, at approximately 60 cents per barrel.
Yet, OPEC+ officials are not yet reassured that they may breathe. Even with the Russian output cuts, oil stockpiles are expected to continue to rise over the next few months before reversing course in the second half of the year. According to current OPEC estimations, global oil stockpiles will only fall dramatically in the fourth quarter, when oil consumption will increase to 30.4 million barrels per day compared to the present daily output of 28.9 million barrels. This is one reason why they desire a multi-month recovery in China. They would also appreciate proof that central banks are slowing down or perhaps stopping their rate hikes.
The next OPEC+ ministerial meeting is set for the beginning of June. If oil prices rise, the cartel may not have enough data to increase production. The regional oil officials also may prefer to wait until at least the third quarter to act. Thus, any additional oil would not arrive until the end of the year. Some analysts rule out any increase in output in 2023. However, there is a chance that, the cartel may slip behind the curve this year in contrast to previous success in predicting. (Source: Bloomberg)