Opec+ to keep output policy on track: Delegates

The Opec+ coalition is unlikely to deviate from its output roadmap when it meets to discuss April policy next week, delegates said, even with uncertainty about potential sanctions on key producer Russia pushing global crude prices to seven-year highs.

Opec+ ministers will assemble to iron out April supply and producer targets on 2 March, following meetings a day earlier of their Joint Technical Committee (JTC) and Joint Ministerial Monitoring Committee (JMMC) — which respectively study market fundamentals and member performance. In addition to supply and demand considerations, ministers will mull renewed international calls to release further production into the market, with global benchmark crude prices above or near $100/bl following this week's Russian invasion of Ukraine.

The EU, US and UK have responded to Russia's militarism with a spate of financial and currency-linked sanctions that have fallen short of constricting the backbone of Moscow's economy — its profitable energy export sector, on which Europe relies heavily for gas and oil. But Opec+ delegates said the group remains focused on demand indicators.

"This group is always looking at supply and demand, and we all know what the reason is behind the hike in the prices we are seeing," UAE oil minister Suhail al-Mazrouei said this week. "Anything outside [fundamentals] is not going to be our job."

Opec+ has increased its collective output quotas by 400,000 b/d each month since the second half of last year, with an eye to fully unwinding its cuts by the end of 2022. But sabotage, underinvestment and dwindling capacity have increasingly widened the gap between targets and delivered output, with the shortfall reaching 800,000 b/d in January according to Argus estimates. IEA executive director Fatih Birol twice last week called on Opec+ to close that gap and provide price relief.

Sanctions on Russia's energy sector could constrain supplies further. Even in the absence of formal restrictions, some banks are no longer producing critical letters of credit required to facilitate purchases of Russian crude, and European and Mediterranean buying of Russian staple grade Urals has all but ceased. Mideast Gulf officials have said supply limitations and term-contract commitments would prevent them from fully compensating for any shortfall of Russian crude.

One delegate said the coalition is likely to discuss the topic of a sanctions-led outage in Russia at the upcoming meeting, and another acknowledged Moscow's incursion in Ukraine has probably disrupted existing calculations for the deal. Two others said Russia's role in Opec+ is unlikely to change, with one saying the group will examine how to respond to any additional crude demand if and when energy sanctions hit Moscow. Such measures would only serve to lift prices further, contrary to the wishes of Opec+ and consumers, that source said, adding the group would work to ensure good supply to buyers.

Any sanctions on Russia would be the third move against an Opec+ producer of sour crudes, following similar US measures on Iran and Venezuela in recent years. This would make it even less likely the group would agree to a redistribution that allows members with higher capacity to compensate for those who cannot produce, a delegate said.

Russia is fast approaching its production ceiling. Its Opec+ target rises to 10.331mn b/d next month, just above its Argus-assessed capacity at 10.3mn b/d. Removing access to Russian crude could incentivise the US to return to the JCPOA nuclear deal with Iran that would allow the latter to increase exports, but Iran's deputy foreign minister Ali Bagheri-Kani this week warned there is no guarantee a deal will be reached.

By Ruxandra Iordache and Nader Itayim