Opec+ waits for Russia sanctions impact

The group is sticking to its planned monthly output increments despite concerns over Russian supply

Opec linchpin Saudi Arabia and its key Mideast Gulf ally the UAE are resisting calls to increase production, as uncertainty over the impact of sanctions on Russia, and continued oil price volatility reinforce producers' determination not to break ranks on Opec+ output policy.

UK prime minister Boris Johnson met with UAE Crown Prince Mohammed bin Zayed and his Saudi counterpart Crown Prince Mohammad bin Salman in the Mideast Gulf this week, in an unsuccessful attempt to persuade both to use their spare crude production capacity to increase oil output. The Opec+ coalition — of which Russia is the key non-Opec member — has stuck to its plan for 400,000 b/d monthly increments in its collective crude output target, resisting pressure to opt for a bigger hike in response to concerns over Russian supply.

Sanctions on Russia could force at least 3mn b/d of Russian production off line as soon as April, the IEA says in its monthly Oil Market Report. The agency projects that surging commodity prices will slash oil demand growth by over 1mn b/d this year. "As sanctions expand, companies shun barrels and... opportunistic buying of massively discounted Russian crude sets in, the total amount of Russian oil lost to world markets is a moving target," the IEA says.

Opec is waiting for firmer data before it changes its own assumptions. It has kept its key oil market projections for 2022 unchanged in its latest Monthly Oil Market Report (MOMR) this week, but it expects to adjust the forecasts in the coming weeks when there is more clarity on the impact of the sanctions. "It is clear that uncertainty will dominate in the remaining months of 2022," Opec says. "Uncertainty with regard to the scope and impact of the current geopolitical turmoil, restrictions and restructuring of production and trade flows, uncertainty as to what degree this will impact inflation and oil demand."

The IEA projects that a 2.5mn b/d cut in Russian exports will leave the global oil market undersupplied in the coming months, with a potential deficit of 700,000 b/d in the second quarter, it says. Even if the Opec+ group decides to boost output beyond its current agreed targets, the IEA estimates that it would take 4-8 weeks for the extra production from the Mideast Gulf to reach consumers. "Contributions from other countries will be marginal in the very near term, with industry and government stocks needed to fill the gap," it says. If an agreement on reviving the Iran nuclear deal is reached, the IEA estimates that Iranian oil exports could ramp up by around 1mn b/d over a six-month period.

Dangerous spikes

The fallout from the Ukraine conflict is not just affecting supply. The IEA expects the surge in commodity prices and the sanctions on Russia to "appreciably depress global economic growth". The 1.1mn b/d cut to oil demand growth that it forecasts for this year would see demand grow by 2.1mn b/d from 2021 to 99.6mn b/d, but would remain more than 800,000 b/d below pre-pandemic 2019. The conflict could cut global economic growth by more than one percentage point over the next 12 months and raise inflation globally by almost 2.5 percentage points, the OECD says.

The IEA's warning for oil consumers comes with a long-term reminder to producers. "Today's alignment of energy security and economic factors could well accelerate the transition away from oil," it says. But with geopolitical news driving sharp swings in the price of oil on an almost daily basis, Opec will continue to proceed cautiously to ensure the unity of Opec+. The group fears that any perception that it might use up its spare capacity would see unprecedented price spikes. "In these highly volatile times, the safeguarding of market stability will remain paramount to both oil producing and consuming countries," the MOMR says.