OPEC+ keeps strategy for turbulent markets

After the “tail wagging the dog” approach formerly by OPEC+, this time the global oil group, made up of OPEC, Russia and several main other non-OPEC members, have presented the market a Formula 1 strategy.

After only 16 minutes of deliberations, OPEC+ ministers presented the global oil markets with a 400,000 bpd production increase in March. The latter is not nearly enough to bring global oil prices down or end a very bullish market sentiment. Even that OPEC+ has been gradually increasing its production volumes by millions of bpd the last months, now producing officially 27.8 million bpd), the market was looking for a much higher figure to quell still sky-high gasoline prices in the main markets.

Current crude oil prices are hovering around US$90 per barrel, which already has taken fuel prices in major markets of Europe to above 2-2.15 euros per litre. With crude oil at a seven-year high, and inflation levels threatening to quell consumer purchasing power in most OECD markets, analysts and governments have been hoping for a stronger statement by countries such as Saudi Arabia, the UAE or Russia. Still, the message of OPEC+ to the media and markets has been very simple. There is not enough fundamental support for a higher increase at present, as some are looking at the geopolitical premium in the market due to the Ukraine-Russia or Iran crisis. Some sources have indicated that the geopolitical premium at present is at least $6 per barrel, which is seen as being too high.

The market is still expecting that OPEC leaders, especially Saudi Arabia, the UAE or Kuwait, but also Russia, are able to increase their overall production levels still sufficiently. This so-called spare production capacity factor, which is plays a pivotal role in the overall stability of the market, however, is under severe scrutiny lately. According to media reports there is a growing fear in the market that the perceived spare production capacity of OPEC kingpin Saudi Arabia or Russia is not available or could be less than what most assessments indicate. The latter fear is even being supported by another major market development – OPEC+ has not been able to deliver on the already agreed upon levels of production.

Major consultancies such as Rystad have bluntly stated that OPEC+ production is already trailing by more than 700,000 bpd, caused by shortfalls in Libya, Nigeria and Angola. Russia, still seen to be officially holding back major additional volumes, has not been producing targets. At present it is 50,000 bpd below the agreed 10.05 million bpd.

American analysts are looking at this situation as a major opportunity for independent producers, such as ExxonMobil, Chevron or Shell. They are also expecting that part of the shortages at present will be covered by additional production increase of US shale operators the coming months. Looking at independents in general, the current high oil prices are a major windfall for them. With ExxonMobil indicating that its break-even is set at $41 per barrel, profits are sky-high. Shell also reported the latter in its year report.  If all US reports are to be believed, US shale and other production is expected to be increased substantially. Exxon reported to increase its Permian Basin production by 25 percent to 600,000 bpd. The latter, especially when taking it for granted for the whole US shale sector, is still to be proven. Share buyback programmes are also being put in place, removing billions of US dollars from a potential upstream investment in future. To rely on independents, as was the case before 2015, could be putting hope on a dream, not reality. The role and power of independents in the coming years could be not enough to counter OPEC+ production problems anymore.

It is understandable that OPEC+ is wary of showing a too bullish strategy, as inflation, an end to QE, or a Russian organised global geopolitical storm could blow optimism to smithereens. In case of a Ukraine conflict or a possible JCPOA Iran deal lifting sanctions, the market will be in turmoil, possibly cutting oil price settings. Still, OPEC+’s current approach, however rational it may seem to be, is now putting full pressure on the demand side. Consumers and industry worldwide are struggling with high prices, especially as they are still reeling from the COVID-19 fall-out.

Taking the devil’s advocate approach, OPEC+ however is also in a corner. High oil prices, even if they officially will not admit, is a God-sent on the short-term. It puts some additional stability in the group, mitigating some of the pressure coming from Abu Dhabi and some others to increase quotas, while also filling up the rather empty coffers of most governments. Some even could again say, the current price – production strategy of OPEC+ is a logical outcome of COP26 and the energy-transition onslaught. Monetising reserves and building up investment portfolios to diversify economies is a clear target of most OPEC+ members.

Still, by not showing real strength, or some market momentum, OPEC+ now could be facing growing fears they are not able to deliver whatever is needed anymore. The threat of new spare production capacity discussions in the market could and will diminish the current power position of some members for a long time. Saudi Arabia is one of the main targets, if fear is going to rule the market. Lagging production of Nigeria, Angola or Libya, is not news for most. A cautious or perceived weakness in Riyadh or Moscow will shake the market on its fundamentals. Maybe this time, Riyadh and Moscow, supported by capacity in Abu Dhabi, should have taken a Las Vegas Poker approach. In the short term, everyone can produce more, taking a bet on lower growth in the coming months. What is clear is that the market is not used to a cautious approach coming from the Kingdom of Oil or the Kremlin.