Oil: OPEC + towards a new modest opening of the valves

Posted 03 May, 2022

While calls have grown since Russia's invasion of Ukraine for the cartel to relieve the market, OPEC+ will this time have a new argument to justify the status quo: demand is crumbling.

War in Ukraine is still raging but prices are falling under the effect of confinements in China: the OPEC+ alliance approaches its traditional monthly meeting with less pressure to open its crude floodgates widely.

As almost every beginning of the month since the outbreak of the COVID-19 pandemic, the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC), led by Riyadh, and their ten partners led by Moscow (OPEC+) meet Thursday by videoconference to make any adjustments to their production.

Since Russia's February 24 invasion of Ukraine, which boosted prices amid supply fears and talks of a Russian oil embargo, calls have grown for the cartel to relieve the market.

Without success so far, this time, OPEC+ will have a new argument to justify the status quo, as demand for black gold crumbles.

According to many analysts, OPEC+, an alliance that was created in 2016 to regulate the market, should therefore once again stick to a marginal increase in total volume, of around 400,000 barrels per day.

It would thus be a continuation of the strategy of modest reopening of its taps, initiated in May 2021 in a context of recovery, after drastic cuts to overcome the shock of the pandemic.


Inflation and COVID


Since March 31, the last meeting of the cartel, prices have remained in the same range, oscillating between 97 and 115 dollars for Brent from the North Sea, the benchmark for black gold in Europe, and between 92 and 110 dollars for the American WTI.

The recent price declines were triggered by "fears that the ongoing coronavirus lockdowns in China could seriously dampen demand for oil there," said Carsten Fritsch, an analyst at Commerzbank.

China is facing its worst epidemic outbreak since spring 2020 and has taken drastic measures, especially in the metropolis of Shanghai, whose 25 million inhabitants have been forced to stay at home for a month.

The country is the second-largest consumer and largest importer of crude oil in the world.

Also weighing on the market are fears of a global economic slowdown caused by the war in Ukraine.

The International Monetary Fund (IMF) at the end of April sharply lowered its forecasts for global growth for 2022 due to the “seismic waves” caused by the conflict, in particular galloping inflation which undermines the purchasing power of consumers.

In this feverish climate, OPEC+ has revised down its forecasts for global oil demand.


Supply squeeze


The market remains however still tense, “the members of OPEC + struggling to achieve their production objectives”, even modest, recalls John Plassard, an analyst at Mirabaud.

Endowed with the most abundant reserves in Africa, Libya is in the grip of a long and serious politico-institutional crisis which has led to the blocking of oil sites.

The National Oil Company (NOC), the only company authorized to market Libyan crude, announced in mid-April the cessation of operations in two major oil terminals and the closure of many fields.

In an interview with AFP, Oil and Gas Minister Mohamad Ahmad Aoun reported a drop in production "of around 600,000 barrels per day", or half of its daily level.

Another element likely to mistreat the market, the European Union is discussing a gradual cessation of its purchases of black gold in Moscow in order to dry up European funding for the war led by the Kremlin.

In 2021, Russia supplied the Twenty-Seven with 30% of crude oil and 15% of petroleum products.

This stop "which seems more and more likely", combined with an OPEC + alliance which does not seem ready to accelerate the pace of production, "will restrict supply and therefore keep oil prices at a high level", estimates Han Tan, an analyst for Exinity Group.

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