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Irina Slav

Irina Slav

Irina is a writer for Oilprice.com with over a decade of experience writing on the oil and gas industry.

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OPEC Is Treading Lightly As Bearish News Mounts

  • The IEA and OPEC have both revised their oil demand projections, hinting that prices could see a meaningful decline in the coming months.
  • China’s latest COVID lockdowns are also adding some bearish pressure to the oil market.
  • Depending on how China’s COVID situation develops, and whether the EU decides to fully sanction Russian oil, OPEC could potentially revise its production growth agreement. 

This week saw some good news finally for oil consumers. Both OPEC and the International Energy Agency revised down their demand projections, suggesting that prices finally had some meaningful downward potential. But OPEC stands ready to change track. "Severe new lockdown measures amid surging Covid cases in China have led to a downward revision in our expectations for global oil demand in 2Q22 and for the year as a whole," the IEA wrote in its latest Oil Market Report this week.

The agency also noted that OECD members consumed less oil than previously expected, which led the IEA to revise down its demand outlook for the year by 260,000 bpd from last month's OMR to a total 99.4 million bpd.

At the same time, the agency cited stable and significant production additions during the first quarter of the year, noting that it was led by non-OPEC producers. Whenever a production increase is led by non-OPEC producers, it's worth watching OPEC even more closely than usual for its response.

This response has yet to come, but the cartel itself is also revising down its outlook for demand for this year. And it is revising it down by a lot more than the IEA. 

Global oil demand was going to be 480,000 bpd lower than previously expected, OPEC said in the latest edition of its Monthly Oil Market Report. The cartel cited slower economic growth because of the war in Ukraine as one reason for the revision, and Covid-related lockdowns in China as another.

As for supply, the IEA seems to be perfectly calm. After sounding the alarm about the potential loss of 3 million bpd of Russian oil exports because of Western sanctions, the agency now said that the coordinated release of a total 240 million barrels of crude, of which 180 million bpd to be released by the United States, would offset the effect of lost Russian supply.

It seems that the IEA is assuming that the loss of Russian supply will be temporary—just as the effect of the reserve release will only last for as long as the release lasts, if not less. And OPEC may yet serve a nasty surprise to IEA members ready to tap their own strategic reserves to normalize benchmark prices.

Related: Permian Could See Production Surge As New Permits Reach All-Time High

Earlier this month, OPEC met with European Union representatives only to tell them that it would not be stepping in to help if Russian oil exports were completely shut off.

"We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions. Considering the current demand outlook, it would be nearly impossible to replace a loss in volumes of this magnitude," said the secretary-general of the cartel, Mohammed Barkindo.

Yet with demand forecasts being revised, OPEC might just decide to revise its production plans as well. With millions of Russian oil out of the (official) picture and a very slim chance of Iranian barrels coming back for the time being, it's up to OPEC and the U.S. to fill the gap. If, that is, they want to.

U.S. producers seem to be warming up to the idea of boosting production, with prices so high their profit margins are fat enough to motivate more drilling. OPEC, meanwhile, boosted its production by just 67,000 bpd last month. That was because some OPEC members saw a decline instead of growth in their oil production, but Saudi Arabia notably undershot its production quota.

At the same time, OPEC revised upward its forecast for U.S. oil production for this year, and history shows that when U.S. oil production grows, OPEC is not one happy cartel and takes steps to counter that growth. Now, with this production growth expectation coupled with expectations of slower demand growth, OPEC's reaction may only be a matter of time.

As for the nature of the potential reaction, it is not difficult to guess it. Right now, OPEC is selling its oil at prices last seen years ago. Buyers have few alternatives amid Western sanctions on Russia and U.S. sanctions on Venezuela and Iran. It's a sellers' market.

Yet news of the resurgence of Covid in China has prompted suspicion that the market is about to flip. After all, China is the world's top importer in terms of absolute volumes, and imports are already down palpably because of the lockdowns. If China needs less oil, less oil should be made available.

Europe seems to be shaping up as a bigger client for OPEC oil right now, but it would be a temporary thing as the EU tries to wean itself off Russian hydrocarbons by replacing them with hydrocarbons from elsewhere.

Europe is not a long-term growth market for OPEC oil and as such, is, to put it bluntly, not an important market for the cartel. That's especially true of the two OPEC producers that have the spare capacity to boost their output considerably.

So, if bearish expectations for oil continue to intensify, depending on how the coronavirus spread develops in China and what EU does about Russian oil, we may well see OPEC revise its production growth agreement with Russia and the rest of its OPEC+ partners before this year's end.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on April 18 2022 said:
    OPEC+ was right to adhere to its production policies and not to react to pressure to raise its production. It continues to maintain the global oil market is still balanced.

    OPEC+ argues that no one single producer in the world or a group producers including OPEC+ and US shale oil can replace 8.0 million barrels a day (mbd) of Russian crude and petroleum products or even half that volume now or in the foreseeable future. Moreover, there is neither evidence of loss of Russian oil exports as a result of sanctions nor of customers shunning Russian oil exports. If that was the case, we would have seen Brent crude oil price hit by now $140-$150 a barrel by now.

    Furthermore, OPEC+’s projection that global demand could be 480,000 barrels a day (b/d) lower than previously expected is precautionary in case of slower economic growth due to the continued Ukraine conflict or a slightly less demand because of COVID-related lockdowns in China. However, there is no evidence of either.

    Therefore, claims by the IEA of a potential loss of 3.0 mbd of Russian oil exports because of Western sanctions and that the coordinated release of a total 240 million barrels of crude by both the US and the IEA would offset the effect of lost Russian supply are disinformation that could be dismissed out of hand. How could a combined release of 1.33 mbd over a period of 180 days offset 3.0 mbd of Russian oil export loss?

    Moreover, US shale oil is a spent force whilst a nuclear deal with Iran isn’t going to see light of day soon.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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