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OPEC+ group’s go-slow strategy may do little to ease Asia’s pain

OPEC and its allies agreeing to a modest output hike may do little to soothe Asian buyers struggling with high oil prices, as concerns loom about the group’s production target being curtailed by capacity constraints, analysts told S&P Global Platts.

Asian refiners have continued to call for OPEC+ to raise supply by at least 800,000 b/d. The group’s decision to increase output by 400,000 b/d for March may not ease tight supplies and cool overheated prices in the region, according to a S&P Global Platts survey of analysts.
Higher oil prices and tight supplies could hit consumption at top consumers China and India, where oil demand recovery has shown resilience following a lengthy period of uneven growth, analysts said.

“Asian consumers would welcome OPEC+ decision to continue to raise production, especially now with oil prices hovering close to $90/b,” said Lim Jit Yang, advisor for oil markets at S&P Global Platts Analytics. “But the actual increase will likely again fall below the 400,000 b/d target, as most OPEC+ members outside of Saudi Arabia, Kuwait and the UAE appear to be reaching capacity constraints.”

OPEC and its allies Feb. 2 reaffirmed that they would not provide additional supplies beyond the previously agreed 400,000 b/d monthly.

Oil prices hit a seven-year high end-January. ICE April Brent futures contract was down 43 cents/b from the previous close at $89.04/b in early Asian trading Feb. 3, while the NYMEX March light sweet crude contract fell 60 cents/b to $87.66/b.

Price impact
OPEC+ group’s decision comes amid a much tighter physical oil market, with inventories shrinking and the Brent crude complex in its steepest backwardation on record, nearing $3/b between February and March contracts, according to Platts data.

“With restricted supplies, oil prices will continue to hover around $100/b or more than $100 for the next few months,” said Vibhuti Garg, lead India energy economist at the Institute for Energy Economics and Financial Analysis. “While this negatively impact oil import bills, but at the same time it emphasizes the need to shift to cheaper renewable energy alternatives.”

Major Northeast Asian refiners have stressed that the pace and scale of OPEC+ production hike had fallen far short of their expectations, with the lengthy uptrend in Middle Eastern crude official selling prices adding to the cost burden.

“Outright prices are seemingly headed toward the $100/b mark and on top of this, Middle Eastern crude OSPs are rising, which means Asia pays additional premiums for the cargoes,” said a feedstock procurement and refinery linear programming model strategist at a major South Korean refiner. “As long as the Persian Gulf suppliers keep their output tight, the Platts Dubai price structure will remain supported, adding impetus to higher OSPs.”

The spread between cash Dubai and same-month Dubai futures, which is widely known as Dubai market structure, averaged $2.2/b in January, up 70 cents/b from December’s average of $1.50/b, setting the stage for Middle Eastern producers to hike OSP differentials for their March-loading cargoes.

The Dubai market structure is often used as an indicator of the physical Middle East sour crude market’s strength and is a key element in OSP calculations.

Market balance
S&P Global Platts Analytics expects the impact of omicron coronavirus variant on Asian oil demand to be relatively less severe compared with the delta strain, with many countries still moving toward reopening economies, due to higher vaccination rates.

Asian oil demand is expected to grow by 1.5 million b/d year on year in 2022, from 1.2 million b/d in 2021, with the region depending heavily on crude imports, Platts Analytics said.

The 23-country OPEC+ alliance, which controls about half of global oil production, is aiming to wind down the historic 9.7 million b/d production cuts it instituted during the worst of the pandemic in May 2020 by late 2022. The group is attempting to balance supplies with an expected rise in oil demand by drip-feeding the market with 400,000 b/d each month.

“What matters going forward is whether OPEC+ can keep up with its planned production increases,” Capital Economics wrote in a note. “If OPEC+ continue to under-produce, it is possible the group will schedule slower production increases this year. But with prices so high, there is an incentive to instead re-configure the scheduled increases, allowing countries with greater spare capacity like Saudi Arabia to raise production faster, but this could prove difficult to agree on.”
Source: Platts

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