Opec+ brushes aside Russia concerns, sticks with plan

Opec+ has agreed to stay the course and plough ahead with a 400,000 b/d increase in its collective crude production quota for April, resisting pressure to opt for a bigger hike in response to mounting concerns over Russian supplies.

The producer alliance met virtually today against a backdrop of Russia's invasion of Ukraine and the resulting surge in oil prices, with the front-month Brent and WTI contracts both exceeding $110/bl earlier for the first time since 2014. The sharp rise in prices since tensions began to escalate in Ukraine has prompted repeated calls from key consumer countries and the Paris-based IEA for Opec and its non-Opec partners to consider raising their output more aggressively. The IEA took matters into its own hands by announcing yesterday that it would co-ordinate a release of 60mn bl of oil from strategic reserves, although it has done nothing to dampen prices. "The question is how quickly they plan to release those barrels," an Opec+ delegate said.

Ahead of the meeting, Opec+ delegates insisted that the market is not short of oil and that the rise in prices is down to geopolitical tensions and sentiment, rather than fundamentals. But the group has acknowledged a tightening in the market. In an internal report distributed at the Opec+ Joint Technical Committee (JTC) meeting yesterday, the group's base case forecast for oversupply this year was revised down to 1.1mn b/d from 1.3mn b/d previously. The base case has global oil demand rising by 4.2mn b/d in 2022 and surpassing pre-Covid levels in the second half of the year, unchanged from previous estimates.

The 19 countries participating in the Opec+ deal are in the process of gradually restoring all of the crude production that they removed from the market in 2020 in response to the Covid-induced collapse in demand. Under a roadmap agreed last summer, the coalition has been increasing its collective crude output target by 400,000 b/d each month since August. But several members have been struggling to meet these rising quotas in recent months, and the group as a whole was 800,000 b/d below target in January, according to Argus estimates.

Most of the group's spare production capacity is concentrated in just a handful of countries including Saudi Arabia and the UAE. The introduction of a mechanism for these Mideast Gulf producers to make up for shortfalls from other countries would be difficult to sell to the wider group, particularly Russia, which is struggling to market its own crude in the wake of last week's invasion of Ukraine. Russian Urals crude is at its widest ever discounts to Atlantic basin benchmark North Sea Dated, with refiners in Asia and Europe seeking alternatives. Although western sanctions have so far not directly targeted Russian oil exports, the risk of being exposed to future sanctions has triggered a near complete collapse in buying interest in recent days.

Opec+ ministers will next meet on 31 March.

By Adal Mirza, Nader Itayim and Ruxandra Iordache