Will OPEC+ fill the gap as Russian oil production falls? Don’t count on it.

Talk of a potential deal that would allow other OPEC+ producers to fill the crude oil supply gap left by Russia has got oil prices under control, but it would take much more to bring them down, analysts said.

“Excluding Russia from the OPEC+ output deal and allowing other producers like Saudi Arabia to pump more could temporarily relieve the market, but the lack of sufficient spare capacity is an increasingly mandatory constraint at a time of resurgent post-pandemic mobility,” said Edoardo Campanella, a Milan-based economist at UniCredit Bank, in a note on Wednesday.

OPEC+ – made up of the 13-strong organization of the petroleum exporting countries and 10 other major producers including Russia – is scheduled to hold a regular monthly meeting on Thursday. The Wall Street Journal reported Tuesday that some OPEC members were exploring the idea of ​​exempting Russia from production targets.

OPEC+ last year agreed to increase production in monthly increments, but Russian production will be cut by around April 8 this year due to sanctions and embargoes from buyers in response to the invasion of Ukraine in late February, where fighting rages on % decrease. The Wall Street Journal article noted that there had been no formal push to exempt Russia and it was not clear whether Moscow would agree to such a proposal.

Oil futures retreated from session highs to end mixed after Tuesday’s report. Crude oil futures were higher in Wednesday’s session, with August Brent crude BRN00,

the global benchmark rose 63 cents, or 0.6%, to $116.25 a barrel on ICE Futures Europe. West Texas Intermediate crude for July delivery CL.1,

the US benchmark rose 55 cents, or 0.5%, to $115.22 a barrel on the New York Mercantile Exchange.

US stocks posted losses in early June but traded well below session lows, with the Dow Jones Industrial Average DJIA,
Lost around 60 points, or 0.2%, while the S&P 500 SPX
was 0.2% lower.

An exception to production increases would reflect the reality that Russia is unlikely to be able to increase production due to sanctions on oil exports by the US, Britain and, as of this week, European Union countries, said Robbie Fraser, global manager Research and analytics at Schneider Electric in a note.

“While Russian production has shown reasonably resilience so far, production is expected to decline in the coming weeks and months,” he wrote. “That could put Russia in a similar status to countries like Libya or Iran, which have even been barred from coordinated production efforts due to a mix of political unrest and international sanctions.”

But OPEC+, which has been raising production targets in monthly increments of 430,000 barrels per day, continues to struggle to meet them. Analysts have attributed a lack of spare capacity in much of the region to years of underinvestment.

Saudi Arabia’s Oil Minister, Prince Abdulaziz bin Salman, warned in May that the world was “running out of energy capacity at every level”. according to news reports.

Meanwhile, the oil market remains extremely tight, noted UniCredit’s Campanella, a situation that hasn’t been helped by OPEC+’s inability to meet its targets. This will get worse if Russia’s production falls (see chart below).

UniCredit Bank

Factoring in production losses from Russia and assuming missing barrels from other OPEC+ countries remain unchanged, the cartel would miss its target by around 4.5 million barrels a day by July, he estimated. In other words, OPEC+ production would be the same as last August. In reality, it is likely to be less, said the economist, because with the exception of Saudi Arabia, the United Arab Emirates and Iraq, all other OPEC+ producers have hardly any spare capacity and will not be able to boost production as much in the next few days , as needed two months.

Campanella said an agreement to exempt Russia from the deal on Thursday would likely have a short-term negative impact on crude prices but is unlikely to last. Only the complete abolition of OPEC+ quotas and a renewal of the Iran nuclear deal would be enough to rebalance the market, he argued.

The math works like this, Campanella said:

Overall, OPEC+ (ex-Russia) free capacity is 4.2 mb/d. If it were fully released overnight (practically complicated), it would hardly make up for the missing barrels expected in July… But by that time, OPEC+ would no longer be able to add additional barrels as it will have exhausted its entire production capacity. Considering that global demand is projected to increase by 2.2 mb/d in 2H22 and non-OPEC+ production is projected to increase by about 1.3 mb/d, the world would be missing 1 mb/d. Only a swiftly signed Iran nuclear deal could close the deficit and bring the market back into balance.

This reality, combined with the potential negative impact of the war between Russia and Ukraine on the natural gas market as winter approaches, means the risk of Brent being held in the $115-$125 per barrel trading range for an extended period , is up significantly, along with the potential for a rise to $130 a barrel, Campanella said.

Read: Why India is the big winner as EU oil ban on Russia redraws energy trade map Will OPEC+ fill the gap as Russian oil production falls? Don’t count on it.

Brian Lowry

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