OPEC+ stays the course, approving 400,000 b/d oil output increase for April
OPEC and its allies on March 2 rubber-stamped another modest 400,000 b/d production rise for April, choosing to ignore the Ukraine crisis despite the market’s growing aversion to Russian oil, which has sent crude prices to near eight-year highs.
Ministers made the decision in a quick meeting that lasted less than 15 minutes, with no discussion of Russia’s invasion of Ukraine and its impact on oil flows, according to delegates involved in the talks.
Nor did the alliance consider offsetting the impending 60 million barrel multilateral strategic oil release being coordinated by the International Energy Agency, the delegates said.
Ministers had strongly signaled the decision for weeks, shrugging off complaints from the US and other key consuming countries about oil prices that have surged past $110/b in recent days, as global oil demand recovers from the pandemic and western countries ratchet up sanctions on Russia.
In its post-meeting communique, the OPEC+ coalition “noted that current oil market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes in market fundamentals but by current geopolitical developments.”
The OPEC+ alliance, which remains on pace to wind down its record pandemic production cuts by late 2022, will convene again March 31 to decide on May output levels.
The invasion has upended the oil market, with traders increasingly wary of transacting in Russian commodities and with Russian counterparties, even though no direct sanctions on its energy exports have been levied. As a result, key Russian export crude grade Urals sunk to a record-low discount $18.31/b against Dated Brent for cargoes in Rotterdam on March 1, according to Platts assessments by S&P Global Commodity Insights.
On March 1, anticipating the unwillingness of OPEC members to step in with more supplies, the IEA said it will release 60 million barrels from strategic petroleum reserves over the next month — or about 2 million b/d — “to send a unified and strong message to global oil markets that there will be no shortfall in supplies as a result of Russia’s invasion of Ukraine.”
OPEC+ countries, which collectively control about half of global oil production, have largely stood by their ally, keen to preserve the group’s oil market hegemony after more than five years of cooperation on output cuts, rather than launch an internal market share battle.
Russia tied with Saudi Arabia as the bloc’s largest producer in January, pumping 10.08 million b/d of crude, according to the latest S&P Global Commodity Insights OPEC+ survey. It exports roughly 5 million b/d.
Key Russian export crude grade Urals is medium sour, with Saudi Arabia’s Arab Light, the UAE’s Upper Zakum and Oman Export Blend among its major competitors within the OPEC+ alliance.
With Russian barrels struggling to find buyers, traders say demand for Middle East crudes is rising, driving up prices.
S&P Global assessed May cash Dubai at $110.01/b on March 2, the highest since June 25, 2014, and a premium of $11.96/b to same-month Dubai futures.
“The market is already extremely tight, something OPEC+ still seems unwilling to acknowledge after leaving planned increases unchanged again in April,” said Craig Erlam, a senior market analyst with Oanda.
Saudi Arabia’s state-run oil giant Aramco is due to issue its official selling prices for its April crude loadings on or around March 5 and then set its allocation volumes shortly thereafter. Other Middle East producers typically follow Aramco’s lead on pricing, which will set the tone for how the region responds to shrinking Russian supplies.
OPEC+ countries also have financial reasons for wanting oil prices to linger around $100/b, after suffering painful losses from the pandemic market crash of 2020.
Fiscal breakeven oil prices required to balance OPEC+ country budgets are far lower now, as the coalition has brought back much of its crude production. For Saudi Arabia and Russia, their breakeven price is identical, at $65/b, according to S&P Global Commodity Insights.
Even with approval of the 400,000 b/d hike in production quotas, the actual increase in output is likely to be far less, as many OPEC+ members are struggling with internal disruptions and declining mature fields.
Out of the 23-country alliance, only Saudi Arabia and the UAE hold any significant spare production capacity, though both countries have so far been unwilling to breach their quotas.
Iran, currently under US sanctions, could be another supply release valve, if the nuclear deal can be revived.
OPEC+ ministers did not hold a press conference following their decision, though Russian Deputy Prime Minister Alexander Novak, who participated in the meeting, told state broadcaster Rossiya24 that the group sees an improving oil market ahead.
“We expect a further increase in demand. Inventories continue to decline, the market is recovering,” Novak said, without addressing the crisis. “We also see that there are uncertainties in the market, we will continue to meet monthly to assess the situation in the market.”