Opec+ delegates see rally rooted in geopolitics

Some ministers still fear the Omicron effect and geopolitical shocks, as the group struggles to hit its output targets, writes Ruxandra Iordache

Opec+ ministers do not fully buy talk of a lasting demand recovery and are likely to agree just another 400,000 b/d output increase at their 2 February meeting.

The current oil price rally has been stoked by geopolitical risks and short-term fuel switching, rather than by more sustainable demand increases, some Opec+ delegates tell Argus. Four incidents have rattled some of the group's largest producers in January alone. These include protests in Kazakhstan and a 24-hour shutdown of the Iraq-Ceyhan crude pipeline. Abu Dhabi intercepted a missile on 24 January in an attack claimed by the Houthis. A similar attack on 17 January killed three people and caused a fire at oil tanks in the UAE.

None of the episodes caused significant output losses. But geopolitical risk is becoming a bigger factor elsewhere. Disruption in Libya removed up to 300,000 b/d of light sweet crude from the market in late December to mid-January. And the largest potential risk factor is still mounting around Russian intentions towards Ukraine and the potential reaction of the US and its allies.

The IEA has raised its global oil demand forecast by 170,000 b/d to 3.3mn b/d for 2022 as a result of softer-than-expected Covid-19 restrictions. Analysts at banks Goldman Sachs and Barclays have raised oil price forecasts for this year because of a lower-than-expected Omicron effect. And middle distillate markets are showing unmistakable signs of growing prompt tightness. Yet some Opec+ delegates say the global demand outlook was destabilised by the Omicron variant and its ultimate impact is still uncertain. One delegate suggests that some of this demand growth could be short-lived, warning that consumption could be buoyed by fuel switching during the northern hemisphere winter.

Opec+ ministers have opted to approve 400,000 b/d quota increases each month since adopting the schedule in July last year. Having occasionally taken the path of least resistance for internal political reasons, it would be a surprise if they did not again agree to another 400,000 b/d increase for March. But the group's collective target is increasingly becoming a virtual thing, a platonic ideal of what their production ought to be, as more members fall short of their quotas.

A question of capacity

The 19 Opec+ countries limiting output produced 650,000 b/d below the collective target in December, compared with a 550,000 b/d shortfall in November, thanks to the growing chokehold of infrastructure issues, under-investment and sabotage (see graph). Russia increased output by just 10,000 b/d to 9.95mn b/d in December, despite gaining an extra 100,000 b/d of quota headroom. The IEA has revised down its estimate of Russia's sustainable production capacity to 10.23mn b/d from 10.4mn b/d, leaving it with much less to draw on to meet future quota changes. Output recovery can prove difficult after halting a well, even if increases are allowed, the Russian Duma's energy committee chair Pavel Zavalny says.

The solution to dwindling spare capacity within Opec+ - increasingly concentrated in just Saudi Arabia and the UAE - is not an easy one (see graph). Most Opec+ countries would probably reject a mechanism that allowed other coalition members to raise output to make up for the shortfalls, two delegates say. But these objections would be likely to simmer down as the deal progresses and more countries exhaust their capacity, one of the two delegates says.

Demand growth could be partly met by more supply from Opec members exempt from the output restraint deal. Libyan output returned to 1.2mn b/d by 17 January, after the restart of four fields. Venezuelan production rose to a 22-month high of 750,000 b/d in December, thanks to the use of Iranian condensate and domestic refinery output to blend with extra-heavy crude supply.

Opec+ production vs quotas V

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