OPEC’s minor production increase was the only viable option

The August 3 ministerial meeting of OPEC+, the alliance between the 13 OPEC members and 10 friendly nations, was noteworthy in several ways.

It was the first meeting to be chaired by the new OPEC Secretary General, Haitham Al Ghais, who had been appointed to the position in an OPEC ministerial meeting last January.

A highly respected and seasoned technocrat with proven diplomatic abilities, he held several senior positions in Kuwait Petroleum Corporation, advised Kuwaiti oil ministers, and is well known within the circles of OPEC+. 

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Critically, the organisation has to grapple with the fallout of geopolitical incidents, such as the war in the Ukraine, with an impending oil embargo against Russia and tensions in the Taiwan Straits. 

While oil demand had recovered to pre-pandemic levels more quickly than expected, it’s now being dampened by a global recession, high inflation, supply chain bottlenecks and rising interest rates. 

But it’s also concerning that OPEC is running out of spare capacity in a severely constrained market.

Against this backdrop, OPEC+ did the only pragmatic thing possible, which was to increase production symbolically by 100,000 barrels per day (bpd) to acknowledge international pressure.

It also preserved some headroom for later in the year, when demand is forecasted to increase and the scheduled release of strategic petroleum reserves in the US will end.

In July and August, the organisation upped production by around 600,000 bpd. The organisation’s press release bemoaned the lack of investment in the upstream sector. 

It was a clear sign that the world is running out of spare capacity. 

Analysts agree that it stands at around 2 million bpd within OPEC — the bulk of which comes from Saudi Arabia, and the rest from the UAE. 

At the same time, there is considerable volatility in the crude supply from countries which face internal difficulties and strife, such as Libya, which added around 500,000 bpd recently.

But that can fall off at any time if the political situation in the country deteriorates again.

The oil price fell to just above $96 for Brent on the news. That was a reflection of the lacklustre consumption figures from the US Energy Information Administration for the week ending July 29, 2022. Crude oil inventories increased by 4.5 million barrels week-on-week.

Amos Hochstein, Senior Advisor for Energy Security at the US State Department, reacted mildly to the smallest increase ever in OPEC history. 

His comments also showed the markedly different objectives of the US and OPEC. Whereas the Biden administration is mainly concerned with petrol prices at the pump on the eve of congressional midterms, OPEC’s explicit mandate is to keep oil markets adequately supplied.

Going forward, Al Ghais has his work cut out. OPEC’s monthly oil market report foresees global crude consumption increasing in Q4 of this year, with a drop of demand to the tune of 1.7 million bpd in the first half of 2023.

He will need to navigate between continued US demands to pump more and the fears of a global recession. Sanctions against Russian oil will come into force at the end of the year. 

Russia will continue to export crude. So far, Russian supplies have been diverted to China and India, admittedly at a discount, which gives GCC producers the opportunity to sell their oil to Europe. 

Rearranging trade flows always creates volatility, and it always comes at a price. 

Russia remains a member of OPEC+. Both Saudi Arabia and OPEC have kept reiterating their adherence to the Declaration of Cooperation, which is the framework agreement binding Russia and the other nine non-OPEC countries into OPEC +.

Beyond that, OPEC+ has to balance fears of recession with rising demand, and waning spare capacity, while tensions rise in the geopolitical landscape. 

This is not an easy feat and will require stamina, resolve and diplomatic skills from the new Secretary General. 

As for GCC nations, Brent may be at a near six-month low at $96.25 per barrel. It is still about 50 percent higher from where it stood a year ago however, which is positive from a budgetary perspective.

Cornelia Meyer, business consultant, macro-economist, and CEO of Meyer Resources