Oil: Speculation on Production Plans Driving Price Action
2022.11.23 06:43
OPEC and OPEC+ aren’t meeting until Dec. 4, but rumors about OPEC’s plans for oil production are already making headlines and moving the market.
On Monday, the Wall Street Journal reported that OPEC delegates are discussing increasing production quotas by a total of 500,000 barrels per day (bpd). This, combined with news from China that are being put under COVID restrictions, sent and by more than $5 per barrel. Prices later rebounded after the Saudi oil minister denied the report.
OPEC’s next meeting also comes just before the G7’s controversial sanctions and price cap policies on seaborn Russian oil are scheduled to be implemented on Dec. 5. The G7 have not yet released the actual price cap even though they plan to implement the price cap policy in less than 2 weeks. It is unlikely that the G7 sanctions policy will be impacted by any OPEC or OPEC+ policy agreed upon a day earlier.
Here are some issues traders should be aware of relative to OPEC’s next meeting.
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OPEC members like Iraq, Saudi Arabia and the UAE are seeing increased demand for their oil from European countries. G7 countries need to replace the Russian oil they were buying with oil from elsewhere, and Iraq, Saudi Arabia and the UAE are some of the few oil producing countries that have spare capacity. A small increase in production quotas, like the one reported on by the Wall Street Journal, could allow Iraq, Saudi Arabia and the UAE to satisfy these orders.
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OPEC+ might revise production quotas at the meeting. The group is still using baseline quotas agreed upon at the end of 2016. Those quotas were based on countries’ production rates from October 2016 and are now outdated. Many countries can no longer produce as much oil as they could back in 2016, and there are some countries that are capable of producing more oil than they could in 2016. Iraq has already asked for a of its quota because it has spare capacity to use. This type of country-by-country revision is not unheard of for OPEC. In July 2021, OPEC revised the UAE’s baseline quota higher after the UAE held up the entire meeting for a week. However, it would be beneficial for the market if OPEC would revise all the baseline quotas to reflect current production capacity as the Saudi oil minister hinted at last month.
There is talk that once the sanctions on Russia are implemented, OPEC+ will no longer be an important market force because Russian oil production will be handicapped. This is very unlikely because even if Russian oil production declines by 1.4 million bpd (the IEA projection), it will still remain an important source of oil for non-G7 countries. There will likely be a period of adjustment like the market witnessed in March and April 2022, but Russia will still be an important player in the global oil market. Saudi-Russia ties have remained strong and the Saudis understand that OPEC has more influence in the market with Russia than without it. Even if Russian oil production decreases for a time, the big OPEC players like Saudi Arabia and the UAE understand that Russian involvement in OPEC+ benefits them in the long run. Therefore, they will do what is needed to keep Russia involved despite the sanctions.
