Over the past month, oil markets have been rocked by a war that has triggered soaring prices and threatened critical shortages of crude and other petroleum products.
But when most of the world’s biggest oil producers meet by teleconference on Thursday to discuss supplies, analysts aren’t expecting much action. OPEC and Russian officials are likely to do little more than announce their usual modest monthly production increases, raising questions about how much oil the group actually has in the tank.
Western sanctions imposed on Russia following its invasion of Ukraine are likely to result in the loss of substantial quantities of crude and petroleum products, especially diesel fuel, from the market. Already, major buyers of Russian oil, such as Shell and TotalEnergies, have said they will gradually purge Russian-sourced oil from their vast networks.
“These losses will endure as Russia will likely remain the most sanctioned country in the world for the foreseeable future,” wrote Helima Croft, head of commodities at RBC Capital Markets, an investment bank, in a note to clients on Wednesday.
Russia is one of the world’s top three oil producers, along with the United States and Saudi Arabia, and exports about eight million barrels a day of crude and products. The International Energy Agency, the Paris-based group, estimates that up to 3 million barrels a day of Russian oil, or about 3% of global supply, could soon be shut down in what “could be turn into the biggest supply crisis in decades”. .”
Only Saudi Arabia and the United Arab Emirates could produce significantly more crude “which could help offset a Russian shortfall,” the agency said in its latest oil market report.
Yet these countries – the de facto leader of OPEC and a key ally – seem unwilling to act, a stance that seems puzzling given their longstanding security and trade ties with the West.
“The larger question is: do they even face technical hurdles” to bring additional large volumes of oil online? said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. Saudi Arabia says it has the capacity to produce about 12.5 million barrels per day, more than 2 million barrels per day above recent production.
Granted, most OPEC Plus members are already running out of firepower, as countries like Nigeria and Angola have been unable to keep up with recent targets. The group is likely to add only a small fraction of the production boost it announces on Thursday, according to Mr. Bronze’s figures. Russia will clearly not be able to increase production as it already lacks storage tanks for unsold oil.
Additionally, the group is nearing the end, later this year, of the unwinding of the steep production cuts in early 2020 that helped support the market when demand and prices fell at the start of the pandemic.
The Saudis and Emiratis may think that with prices soaring and the outcome of the conflict in Ukraine far from clear, now is not the time to free up their remaining resources. While events like shutdowns in China likely reduce demand, oil consumption is still likely to be higher during the summer driving season and production could potentially be lower.
The fact that closing prices for Brent futures, the international benchmark, have fallen in recent weeks from nearly $130 a barrel to less than $100 allows the group to claim, however unconvincingly, that geopolitics rather than shortages add a premium to the price and continue to receive huge volumes of money.
“The current volatility is not caused by changes in market fundamentals but by current geopolitical developments,” the group said after its last meeting on March 2.
In addition, the International Energy Agency is in the early stages of coordinating a release of 60 million barrels of oil, announced March 1, from U.S. reserves and about two dozen other countries. These continued additions to supply reduce the incentive for OPEC Plus to try to influence markets, analysts say.
Also, OPEC Plus does not seem ready to act against the interests of Russia, the group’s co-chair, which would likely oppose a further increase in production that would help countries live without Russian crude.
The UAE, in particular, appears sensitive to Russia’s concerns in the conflict with Ukraine and threatened by the prospect of a democratic revolution represented by the Ukrainian government.
The Russian-Ukrainian War and the World Economy
“There is an affinity for Russia and authoritarians in general” among the leaders of the United Arab Emirates, said Karen Young, a senior fellow at the Middle East Institute, a Washington-based research organization.
There was also frustration among OPEC Plus officials when asked to address what they saw as problems created by poorly thought out Western policies on climate change. OPEC officials say they are being asked to boost production as, at the same time, Western governments and investors lean on energy companies to cut oil and gas investment to boost production. achieve climate goals.
The argument of many producing countries in the Middle East is that painfully high oil and gas prices are the bitter fruit of trying to dispense with fossil fuels before sufficient alternative resources like wind and solar power are available. available.
“We cannot and should not unplug the current energy system until we have built a new one,” Sultan al Jaber, chief executive of Abu Dhabi’s national oil company, told a recent council conference. of the Atlantic.
Yet there is no sign that the West is giving up on moving away from oil and gas, especially from potentially unreliable suppliers like Russia. In fact, Moscow’s use of energy to exert political pressure on European countries could prove to be an incentive for Western countries to reduce their consumption of fossil fuels more rapidly. Germany, for example, is preparing to sever its energy ties with Moscow, which has long been its main supplier.
“The urgent need to accelerate the just transition to clean energy remains a top priority and must be accelerated,” Jennifer Granholm, the US Secretary of Energy, said last week.
The Saudis and the UAE have other reasons not to rush to comply with Western demands. They worry about increased missile attacks on energy facilities and other targets in their country by the Yemen-based Houthi group, and suggest Washington is not doing enough to stop them.
Saudi Arabia recently warned that it would not be responsible if these incidents suppress oil exports to the world. These countries are also skeptical of Washington’s efforts to restore the nuclear deal with Iran and thereby allow Tehran to sell more oil. The Saudis accuse Iran of supplying the Houthis with the missiles launched against them.
Meanwhile, analysts say there is little reason to believe the current oil crisis will not worsen as buyers turn away from Russian oil. “I’m surprised at how low the prices are,” said David Wech, chief economist at Vortexa, a data analytics firm.