OPEC+ begins to struggle with next step as US pushes for more oil

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(Bloomberg) — The OPEC+ oil pact launched at the start of the pandemic is finally coming to an end, and where the group is headed is a politically charged question.

By August, the last of the massive cuts in oil production the group made in 2020 will be reversed, and representatives of the 23-nation coalition say they are now grappling with what comes next.

As President Joe Biden prepares to visit Saudi Arabia – the de facto leader of OPEC – US officials are laying the groundwork for the kingdom and its neighbor, the United Arab Emirates, to go beyond their August production levels and raise further increases. to help cool the oil at prices above $110 a barrel, according to people familiar with the matter.

Right now, Persian Gulf exporters, who want guarantees of regional security before agreeing to pump at levels never seen before, are still weighing their options, the people said, asking not to be named because the information is not public.

Saudi Arabia walks a fine line between heeding the pleas of its longtime but somewhat estranged US ally, and the joint architect of the alliance that saved oil prices from their worst collapse in history – Russia.

In a show of support for the increasingly exiled nation, Saudi Energy Minister Prince Abdulaziz bin Salman this week traveled to the St. Petersburg International Economic Forum, where he posed for a photo with Russian Deputy Prime Minister Alexander Novak and described relations between the two capitals as “good.”

But earlier this month, Riyadh also showed some sympathy for oil consumers’ distress by prompting the group to accelerate production increases by 50% in July and August.

“OPEC has a long history of being pragmatic in the midst of turbulent geopolitics,” said Bjarne Schieldrop, chief commodities analyst at SEB AB. “They want to have the gloss of being seen as a ‘responsible’ actor.”

Limited capacity

In theory, the accelerated time frame for OPEC+ increases in each of those months is 648,000 barrels per day. But the figure is largely symbolic, as most members of the Organization of the Petroleum Exporting Countries and its partners are unable to increase production further. The only spare capacity is limited to only a few members in the Middle East.

Once they meet the targets specified in the current agreement for August, the Saudis and the UAE will have about 2.2 million barrels of unused output per day to deploy, data from the International Energy Agency in Paris shows.

That’s about 2% of global supply, and with rising prices threatening to plunge the global economy into recession, plus sanctions against OPEC+ member Russia sparking further unrest, consumers will welcome any relief they can get.

“There may be a Saudi nod in the direction of releasing more oil, but there is the realization that there is now a limit to what they can do,” said Bill Farren-Price, a director at Enverus Intelligence Research.

Political leverage

The Saudis are considering agreeing to the request, but as the kingdom has enjoyed its greatest political influence for several years, it is unclear whether an agreement will be reached, according to people familiar with the negotiations.

Other OPEC+ countries are quietly trading on the best way forward, delegates said. Ministers will consider next steps either at an online meeting on 30 June or at the latest at a subsequent meeting in late July or early August.

In the wider coalition, some members are personally questioning whether the group should acknowledge its limitations by moving to a less formal approach, delegates said. The system of output quotas in place since late 2016 could be relaxed so that the few countries with capacity can produce at any level, some countries have suggested.

Meetings may no longer be necessary at the monthly pace largely in place since the pandemic broke out in 2020, they said. Before Covid-19, the cartel usually met every six months.

However, it is unclear whether such a shift would be endorsed by Riyadh, which has repeatedly emphasized that global markets are being reassured by OPEC’s careful management style. The kingdom wants the next step to be a consensual, group-wide decision, a delegate said.

political interests

Biden’s visit will highlight how Russia’s invasion of Ukraine has tipped the balance of power in Saudi Arabia’s favor. Four years after denouncing the kingdom and its de facto leader, Crown Prince Mohammad bin Salman, as a “pariah” for the murder of critic Jamal Khashoggi, the US president needs their help.

Without additional Saudi barrels, there is little chance of taming the inflation plaguing the US economy. The kingdom’s oil is also vital to support international efforts to isolate President Vladimir Putin over the invasion of Ukraine.

On the other side is the nearly six-year alliance with Moscow, which has increased OPEC’s influence on the oil market. The dangers of a broken relationship between the two producers were illustrated during the brief price war of April 2020.

Russia “continues to be part” of the oil exporters group, OPEC Secretary General Mohammad Barkindo said in London on Thursday. “We want to build long-term, lasting relationships with these producing countries.”

©2022 Bloomberg LP



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