As analysts warned of an upcoming oil supply crisis, OPEC and its allies, including Russia, decided on Thursday to stick to their previously agreed plan of modest monthly increases. The group, known as OPEC Plus, said it would increase oil production in May by 432,000 barrels per day, up slightly from the usual increase of 400,000 barrels per day for reasons techniques.
In a press release following what was likely a very brief meeting, OPEC Plus repeated its thinking from a month earlier. The group said the outlook was for “a well-balanced market” and that recent price volatility was “not caused by fundamentals, but by ongoing geopolitical developments”, which apparently means war in Ukraine.
By contrast, many analysts are warning that with oil storage tanks at low levels, war-related sanctions in Ukraine and some sort of buyers’ strike underway against Russian oil, a major supply crisis could expand, lowering global economic growth and fueling inflation.
The OPEC Plus announcement came as President Biden was set to go public with his announced plans to release up to 180 million barrels of oil from emergency reserves in response to rising oil prices and in anticipation of… possible spikes in demand or drops in supply.
After months of unsuccessfully asking OPEC Plus to boost oil production to calm troubled markets, Washington appears to have given up on all help from Saudi Arabia and other major producers.
Prince Abdulaziz bin Salman, Saudi oil minister, likes to describe OPEC as a kind of oil central banker, smoothing market swings by adding and subtracting supplies, although analysts dispute the effectiveness with which it has played this role. Under current circumstances, however, OPEC Plus may not be able to act as Russia, although not an OPEC member, has been an integral part and co-chair of the larger group since its formation in 2016. .
Alexander Novak, Russia’s deputy prime minister, reportedly took part in Thursday’s teleconference. A decision to increase oil production could have been seen as helping the West to support Ukraine and as detrimental to Moscow’s interests.
OPEC, whose de facto leader is Saudi Arabia, seems to be trying to ignore the problem caused by Russia’s presence in the group. For example, OPEC’s latest oil market report, published in mid-March, projected that Russia’s oil production would be 11.8 million barrels per day in 2022, an increase of nearly one million barrels per day over 2021 levels.
Not lowering those estimates because of war and sanctions “partly reflects the political sensitivity of revising the forecast downward for Russia,” wrote analysts at Energy Aspects, a research firm.
Other analysts, including those at the International Energy Agency in Paris, predict a substantial drop of around 3 million barrels a day as sanctions hit and companies like Shell and France’s TotalEnergies cut their purchases of Russian oil gradually. In particular, there are concerns about supplies of diesel fuel, which Russia exports in large quantities to Europe.
The Russian-Ukrainian War and the World Economy
And OPEC Plus doesn’t have much oil left to contribute to the world market. The group is already down about 1.3 million barrels per day from its targets and is unlikely to come close to adding 432,000 barrels per day in May. Russia, for example, together with Saudi Arabia, is expected to increase by more than 100,000 barrels per day, to 10.5 million barrels per day; because of the sanctions, it is very unlikely that Moscow will be able to increase its production.
Analysts say only Saudi Arabia and the United Arab Emirates have the capacity to add substantial volumes of additional oil. These producers may be holding back until it becomes clearer how much Russian production will be lost. Market watchers also doubt how much oil they could add soon.
News that the Biden administration may be on the verge of releasing up to 1 million barrels per day, or about 1% of global production, from strategic reserves in the United States could also encourage these countries to save additional volumes available to them for a more convenient time.