OPEC+ Is Playing The Long Game

The latest OPEC+ meeting produced no surprises, with the group reiterating its decision to keep production at current levels for at least another two months.

As always, reports before the OPEC meeting offered contradictory information, with the most notable this time being a WSJ article quoting OPEC delegates as saying the cartel was considering a discussion of a production increase.

Saudi Arabia and others were quick to deny the report, with the Saudi energy minister stating in no uncertain terms that "The current cut of 2 million barrels per day by OPEC+ continues until the end of 2023 and if there is a need to take further measures by reducing production to balance supply and demand, we always remain ready to intervene."

Then there were reports about the possibility of deeper production cuts as oil prices remained weak in the face of a global slowdown, especially in some of the biggest oil consumers.

In the end, however, OPEC did what it said it would do, sticking to its current production levels with an eye to longer-term developments, such as the abovementioned slowdown, the easing of Covid restrictions in China, and, of course, the latest in Western sanctions on Russia.

The reports of a possible production increase suggested that OPEC would act to replace barrels lost due to sanctions on Russia. Moscow repeatedly said it would not export oil to countries enforcing the price cap of $60 per barrel, which drove fears of a significant amount of production being shuttered.

A loss of Russian oil would lead to a further tightening of global supply and, in turn, a spike in prices-a blow that weakened economies would find hard to sustain. That is certainly a bleak prospect, but it appears OPEC+ was in no rush to anticipate it. Indeed, most of the news coming from OPEC+ members would suggest the group is more likely to cut further than to boost production.

For now, the market appears to be unmoved by the price cap. Brent and West Texas Intermediate have actually fallen since Monday when the entry into effect of the cap pushed them higher for a while.

Urals, the Russian flagship blend, is also down after it spiked to $79 per barrel on Monday. Now it is trading at a much more "normal" $63 per barrel-close but higher than the price cap.

Yet it is too early to make any long-term conclusions based on this. Although analysts seem to believe Russian oil will simply be rerouted to Asia, this would mean demand for more tankers and a change in insurance and payment processing to avoid Western service providers that dominate these markets.

While these may be developments that turn out bullish for prices and favorable for OPEC+, the global slowdown continues to be a source of worry for the cartel. Central banks appear determined to stick to their tightening course whatever it costs the economy, and the energy crisis in Europe, rippling across the developing world, is not helping matters.

There is therefore nothing more sensible for OPEC to do than wait and see what happens next, as Reuters' columnist Clyde Russell noted in a recent column. The cartel, he also noted, is still falling short of its own production quotas anyway. Yet this has not been affecting prices, it seems, even though it suggests a chronic tightness of global oil supply.

Some analysts forecast Brent could hit $100 before the end of the year as a result of the anti-Russian sanctions coming from the West. 

Yet with two strong bearish factors-the prospect of a widespread recession and China's continued struggle with Covid-where prices are going to go next remains anyone's guess. And OPEC+ is in no hurry to do anything about it until it absolutely must.

By Irina Slav for Oilprice.com

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