OPEC+ mulls further oil output hike

OPEC+ mulls further oil output hike | Daily Tribune

Saudi Arabia, Russia, and six other key members of the Organization of the Petroleum Exporting Countries and its allies (OPEC+) are expected to agree to further hike oil production in a virtual meeting on Sunday, as the group continues to seek greater market share.

Analysts predict a slight output hike when the group of eight oil-producing countries known as the “Voluntary Eight” (V8) holds its online meeting.

Since April, the V8 group — comprising Saudi Arabia, Russia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman — has boosted production by around 2.7 million barrels per day (bpd) in total.

Emily Ashford, an energy analyst at Standard Chartered bank, expects a production hike of 137,000 bpd from December, which would mirror last month’s decision.

OPEC+ has sped up output increases at a pace very few had anticipated at the beginning of the year, following a long period of producers seeking to combat price erosion by implementing production cuts to make oil scarcer.

But faced with growing competition, particularly from US shale oil producers, gaining a larger share of the oil market has become the group’s main priority.

The group’s change in strategy “is working to a certain degree,” said Ole Hvalbye, commodities analyst at SEB bank.

Supply by US shale producers “is not increasing anymore, it’s going sideways,” he told AFP, adding that there is “less investment in new US production.”

Price resilience

As in previous months, the V8 group is likely to cite “low oil inventories” worldwide to justify a further increase in production quotas.

According to the US Energy Information Administration (EIA), crude oil inventories in the United States have recently recorded a sharp drop, allowing the price of a barrel of Brent, the global benchmark for crude, to remain steady at around $65.

Amid a growth in supply, the announcement came as a surprise, with oil inventories expected “to start stockpiling,” said Hvalbye.

Since September, most of the volumes at sea have risen sharply — even exceeding the levels reached during the Covid pandemic — and they are on their “way to (the) harbor,” he noted.

Adding barrels to the market thus exposes the group to a price drop that cuts into its profits, analysts say.

But not reintroducing them “would cause panic” among investors, said Ashford, because it would imply that OPEC+ “doesn’t see a strong enough market to absorb barrels, which would be seen as bearish.”

However, she said that an increase in OPEC+ quotas of 137,000 barrels would result in lower actual production, limiting the impact on prices.

Looming sanctions

Looking forward, some V8 members that have exceeded their output quotas in the past will need to compensate for their overproduction, and Russia in particular “is already at full capacity,” Ashford told AFP.

In late October, pressure on Russian oil supplies mounted after the United States imposed sanctions on the country’s two largest oil producers, Rosneft and Lukoil.

Analysts say the real impact of the US measures remains unclear, as it will largely depend on how strictly Washington enforces secondary sanctions against foreign financial institutions that engage in transactions with the two firms.

“The market is underestimating what it means when you have US sanctions against two large Russian companies, which are at the core of trading Russian oil,” said Patrick Pouyanne, CEO of French oil and gas giant TotalEnergies on Thursday, suggesting that a significant reduction in Russian supply would support prices.

But many analysts are cautious, arguing that Russia has successfully circumvented Western sanctions. Furthermore, the United States may not take any action against purchases by China, the main importer of Russian oil, with which it has just signed an agreement to reduce trade tensions.