Opec+ ponders whether to stick or twist

April's output cuts appear to have had the desired effect, but the oil alliance may yet cause another surprise

May 22, 2023, 10:03 AM

Opec+ June meeting — Iraq and Turkey previously agreed to wait until maintenance works were complete before resuming the pipeline that contributes 0.5% of global oil supply

The countdown has begun to the next full meeting of Opec+, the oil alliance led by Saudi Arabia and Russia, which is due to convene in Vienna on June 4.

As things stand, it will be a finely balanced decision as to whether the producers hold output steady for the rest of the year, or weigh in with another round of cuts following the surprise decision to take out 1.66 million barrels per day at the beginning of April.

Perhaps the main argument in favour of another cut is the fact that the price of Brent crude saw only a temporary spike upwards after April’s decision, and has since hovered roughly around the $75 mark.

That is probably a little below the level Gulf producers with big state-funded investment programmes would like, and lower than the break-even levels estimated by the IMF for some of those countries.

But it is not far off the “Goldilocks” price – not too hot and not too cold – for the big Gulf producers.

Opec+ sees itself as a force for stability in global oil markets. It is aware of the damage that higher crude prices can do to the global economy, struggling with high inflation, financial and banking stability in the USA and Europe, and the destabilising effects of the war in Ukraine.

When the International Energy Agency (IEA) accused Opec of putting global economic health at risk after the April cuts, the anger in Vienna (and Riyadh) was palpable.

In its defence, Opec points to the fact that crude prices have actually eased since April, amid a noticeably improved outlook on inflation and the end of big interest rate rises.

All that seems to argue for a maintenance of the status quo at the June meeting. But there are several imponderables out there which could change the maths in the next couple of weeks.

One is the continuing repercussions from the Ukraine conflict. It is hard to overstate the impact which the war has had on global oil flows since February last year.

Russia’s direct energy market in the West has, in effect, collapsed.

President Putin is still exporting oil in big quantities, and India and China have jumped at the opportunity to buy Russian oil (trading at a big discount) which previously headed west.

Before the war, India bought hardly any Russian crude but it now accounts for about 40 percent of its imports. China and India between them import more oil from Russia than they do from the Gulf producers put together.

The suspicion is that at least some of this crude finds its way back to Europe as refined products. But so far the West seems happy enough that its price caps and sanctions have kept the Russian oil price low.

Russia’s central role in Opec+ is also a complicating factor. The “voluntary” cuts of April included 500,000 from Russia, but most experts see little sign that this has actually materialised.

If Russia does not deliver on its commitments, it presents an issue of credibility within Opec+. There is less pressure on other members to come up with their own cuts if the Russians are just playing the mood music the oil market would like to hear.

The other big variable on the minds of Opec officials as they consider their options is global demand. The outlook for the economies of Europe and North America looks reasonably benign, barring a resurgence of the US mini banking crisis or a breakdown in Congressional negotiations over the federal debt.

The Indian economy is growing strongly, fuelled by all that cheap Russian oil.

But there is still a question mark over China. Beijing has shown in recent months that it is content to buy crude from the Middle East as long as prices remain around the $75-$80 level. Higher than that and Beijing will buy Russian or dip into its considerable strategic reserve.

The good news is that China is back flying again, with rising demand for jet fuel, and driving too, with all that means for gasoline demand. Where there is still some doubt is for diesel demand, as manufacturing and construction still lag behind the curve of post-pandemic recovery.

Both the IEA and Opec see stronger demand for crude from China in the second half of the year. So as the Opec delegates deliberate, the chances of another cut look relatively slim.

But if there is one thing we have learned about Opec over the past few months, it is not to second guess its thinking. Members seem to like nothing better than to surprise the market.