With unabated Russian oil exports going rogue and the United States pouring over 180 million barrels of crude into the oil market, a boost in the collective output of the coalition of the Organization of Petroleum Exporting Countries (OPEC) and non-member cooperating producers could have delivered a glut effect and crash prices.
It is certain therefore that oversupply would have topped the other reasons the coalition known as OPEC+ has remained cautious with deafening calls on the bloc to supply respond to concerns in the market with supply surge.
The Oracle Today reports that the primary goal of OPEC and its coalition members is to preserve the value of crude oil in the global commodity markets by maintaining a regular balance between the supply and demand factors that determine prices.
OPEC+ increases supplies to ease cost of production inputs and maintain healthy growth of the global economy. The producer group also tightens supplies by withholding production at times when prices dive too low and threaten commercial viability of industry operations. The group cut nearly 10 million barrels per day from global supplies in response to 2020 demand destruction associated with covid-19 pandemic lockdowns. Global activity shut down had momentarily pulled prices below zero dollar per barrel.
Since then OPEC+ has been cautious with flooding the market with supplies even as global clamor for migration of demand from fossil energy rises with enhanced concern for climate change.
With the war in Ukraine and consequent rain of sanctions on invading Russia, OPEC+ has been inundated with calls for increased production to save the globe from supply shock. Hopes of supply boost from the group were high as the ministers met last weekend to determine market scenarios and produce a demand outlook.
But to the chagrin analysts and geopolitical actors, OPEC+ decided that there was no urgent need to alter its rolling marginal production growth plan determined in the last quarter of 2021 to build production back to pre-pandemic levels.
OPEC+ left its production growth plan scheduled 400,000 barrels per day (b/d) for the month of May. It also compensated for previous losses with allocation of a total of 32,000 b/d to bring its production growth mandate to 432,000 barrels per day.
Expectations from Western countries that slammed sanctions on Russia were that the international sanctions which raised credit financing flags on Russian transactions as well as severance of the President Vladimir Putin’s government from diplomatic and trade networks would impact oil supply from Russia. Target of the sanctions was to ultimately hurt Russia’s foreign exchange income.
Thus, sentiments following the sanctions against Russia caused oil prices to rise as the market braced for expected disruption in supply. Disconnection of Russia from SWIFT meant that traders would encounter difficulties in raising financial instruments to execute transactions on Urals crude oil grades. The Urals is the Russian benchmark oil grade, accounting for some 11 million barrels per day of market supply.
With the sanctions, many Western oil companies as well as traders, shippers, and bankers consequently stayed away from Russian oil.
To elude the impact of financial sanctions on its crude oil exports, Russia has briskly adjusted its trade strategies and alliances, disconnecting from traditional partners and forging new connection with new destinations.
It is also demanding payments in local currency from its trade partners, signaling that it would want rubles for all its export commodities including oil, gas, metals and grains. President Vladimir Putin had given to Gazprom and the Russian central bank to arrange for ruble payments for European gas payments.
Russia also signaled that it could soon demand rubles for other exports, including those of oil, metals, and grains. But the new demands have been criticized as unacceptable by some European countries that rely on Russian gas supply.
So, the stalemate in energy trade between Europe and Russia had created a dreadful stance for supply impasse; triggering frantic moves by vulnerable economies to secure alternatives to Russian oil and gas supplies. And Western governments had required OPEC+ to activate its spare production capacity to fill gaps expected from fall of Russian supply to the market.
In preparing the country for a possible disruption or stoppage of supplies from Russia Germany’s Economy minister, Robert Habeck, issued an “early warning” that it could be heading for a gas supply emergency.
Again, fear of impact of Russian sanctions on oil prices and subsequently on domestic inflation has remained the cause of major and lingering disagreements among military, regional and economic alliances that bond industrialized western nations.
And while the U.S. and U.K. have both banned the import of Russian oil; the EU, which is far more reliant on Russian energy, has kept up its buying. EU countries have however set a plan to cut reliance on Russian natural gas imports by two-thirds by next year.
But from the binoculars of OPEC+, there are no visible disruptions that could trigger market supply alarms. And independent observers point at emerging maneuvers by Russian export tankers to avert tracking, showing that the country’s exports have remained strong but veiled.
In the past weeks, it was reported that Russian petroleum trade has plunged into dark activity, as most shipping tankers disappear from global maritime tracking systems. Market reports showed indicated over 600 percent surge transponder outage by sailing Russian oil since the Ukraine War began.
The U.S. government condemns dark activity as a deceptive shipping practice used to evade sanctions, warning that any automatic identification system “manipulation and disruption may indicate potential illicit or sanctionable activities.” And the fear of sanctions and negative reputation associated with Russian trade strongly inform transponder switch-offs by sailing tankers.
The US is part of the countries calling on OPEC+ to increase production to cushion the anticipated fall out of Russian trade sanctions.
The OPEC+ meeting took place at a moment of production hike and deliberate release of high volumes of oil from United States’ strategic reserves as the country grapples with the problem of high petrol prices.
According to weekly data from Energy Information Administration (EIA), U.S. crude oil production rose from 11.6 million bpd in the previous seven weeks to 11.7 million barrels per day. And the US oil players are also laying the grounds for stronger production. the Baker Hughes U.S. oil rig count shows that oil companies in the United States have added 39 drilling rigs over the last 10 weeks even though crude oil production lags rig additions.
Besides, the ongoing progress in Iran nuclear deals and alternate moves by the US government to lift ban on Venezuelan crude supply form windows of imminent supply boost to the market. And OPEC+ maintains an infallible outlook for the oil market, factoring all sources of supply into its computation.
The group agreed in latest meeting that it was in line with market expectations to hike production quotas of Russia and Saudi Arabia to 10.549 million barrels per day (mbd) each. The group also lifted production quota of the UAE to 3.04 mbd, increased that of Kuwait to 2.694 mbd, and that of Iraq to 4.461 mbd. The quotas were fixed in the expectation that the countries would continue to play in the crude oil market.
It does appear that OPEC+, which is in position to know the trade activities of coalition members, does not actually see urgent need for frantic supply surge in the oil market. And its continuous allocation of production quotas to Russia confirms that the group is yet to acknowledge that Russian output is constrained by sanctions.
The bottom line is that Russian oil has continued to flow into the market and OPEC+ finds it unnecessary to intervene in non-existent situation.
Secretary General of OPEC, Dr Mohammed Barkindo, had in response to calls for the groups to position to fill supply gaps expected from Russian sanctions had declared that the group has no spare capacity to fill the space, adding that geopolitical tensions fuelling strong prices in the market were beyond the control of OPEC.
He declared at a recent industry summit in the United States that the oil producing bloc has no control over extraneous geopolitical factors currently influencing oil prices, including the ongoing Russian invasion of Ukraine and consequent economic sanctions raining on the OPEC+ member.
Dr Barkindo who currently coordinates the activities of OPEC+ was clear that group would not accept the responsibility to address the fallout of sanctions imposed by non-member states on a key member of the alliance.
Meanwhile, events have shown that such production falls from Russia are yet to materialize as global tracking agencies indicate unabated oil exports from the country to mainly undisclosed locations.
Market sources reveal in reports surveyed by The Oracle Today that whereas Russia might have gone partially rogue with its oil exports to cover its trails, keen market and maritime tracking agencies keep evidence that Russian oil exports continue to make their way onto China and India at a $30 per barrel discount as buyers find ways to circumvent Western sanctions.
There are also corroborated reports that Russia is currently pumping more barrels to market in order to make up for its discounts and also meet financing contingencies associated with Ukrainian war.
Russian news agencies quoted Deputy Prime Minister, and former Energy Minister, Alexander Novak, as saying that the Western sanctions only caused export flow disruption that required new instruments for insurance of ships, financing and payment. Novak stated that customers are still happy to buy Russian crude oil.
With significant volumes of Russian oil flowing to various countries at discounted rates and adding to the overall global supply, OPEC might have calculated that the market has remained robustly supplied and in trend with its existing production plans.