Crude rally rooted in geopolitics: Opec+ delegates

The recent rally in oil prices has been stoked by geopolitical risks and fuel switching, rather than demand-side improvements alone, some Opec+ delegates told Argus. This shift in focus away from demand could suggest that the coalition is leaning towards another monthly increase of just 400,000 b/d in crude quotas when it next meets on 2 February, after it failed to achieve its output target last month.

Some Opec+ delegates suggested that the current price surge has been led by geopolitics. Four incidents have rattled some of the group's largest producers in January alone, including protests in Kazakhstan and a 24-hour outage at the Iraq-Ceyhan pipeline. Abu Dhabi intercepted a missile in an attack claimed by the Houthis yesterday, after a similar event on 17 January killed three people and caused a fire at oil tanks in the UAE. Although the incidents did not cause any significant output losses, they threatened some of the few Opec+ producers with spare production capacity.

As Ice Brent futures with March delivery are nearing $88/bl today, questions are being raised over a prospective Opec+ response to curtail prices. The group has repeatedly taken the path of least resistance through 400,000 b/d monthly target increases to unwind its outstanding cuts by the end of this year.

The IEA last week signalled that Opec+ efforts to bring back 4.4mn b/d of crude output this year could tighten the group's spare capacity — mainly in Saudi Arabia and the UAE — to 2.6mn b/d in the second half of 2022.

Meanwhile, de facto non-Opec leader Russia — which is gradually nearing its 10.23mn b/d limit, as estimated by the IEA — only increased flows by 10,000 b/d in December, even though the country gained an extra 100,000 b/d in its quota volume. Output recovery can prove difficult after halting a well, even if quotas allow increases, said Pavel Zavalny, chairman of the energy committee in Russia's lower parliamentary house the Duma. Potential US and EU sanctions in the event of a Russian invasion of Ukraine could also weigh on the country's supply.

Argus estimated that Opec+ deal participants fell 650,000 b/d short of their collective December target, as a result of infrastructural issues, underinvestment and sabotage. But at the moment, most Opec+ countries would probably reject a mechanism that allowed other coalition members to raise their output and make up for the shortfalls, two delegates said. These objections would likely simmer down as the deal progresses and more countries in the group begin exhausting their capacity, one of the two sources added.

Some delegates pointed to the demand outlook being destabilised recently by fears that the Covid-19 Omicron variant could trigger a new wave of lockdowns. But the IEA recently raised its global oil demand estimates by 200,000 b/d for 2021 and 2022 — resulting in growth of 5.5mn b/d and 3.3mn b/d, respectively — as a result of softer-than-expected Covid restrictions. US bank Goldman Sachs and UK lender Barclays have raised their oil price forecasts for this year, both citing a lower-than-expected Omicron effect to date.

One Opec+ delegate suggested that some of this demand growth could be short-lived, warning that consumption could be buoyed by fuel switching, as was the case late last year in response to shortages in gas and other energy markets.

Demand growth could be partly met by rising production from those Opec members exempted from the output restraint deal. Libyan output recovered to 1.2mn b/d by 17 January, after the restart of four fields in the west of the country. Venezuelan production rose to a 22-month high of 750,000 b/d in December, thanks to higher imports of Iranian condensate and the use of domestic refinery products to dilute extra-heavy crude supply. Iranian production has largely plateaued near 2.46mn-2.47mn b/d in recent months, but remains at highs last seen in April 2019.

Key consumers are also attempting to make additional supply available through a US-led, six-nation co-ordinated draw from strategic petroleum reserves, although only Washington has so far released crude as part of the initiative. The US, India and Japan all urged Opec+ to consider accelerating its production increases in the fourth quarter last year.

By Ruxandra Iordache and Nader Itayim