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OPEC+ likely to maintain output in light of Kurdish oil dispute

Analysts say the OPEC+ alliance is unlikely to cut production and there could be be a oil glut in the second half of 2023.
OPEC ministers

Ministers representing the OPEC+ alliance will convene Monday to determine whether the group of 23 oil-exporting states should adjust output, against the backdrop of global economic uncertainty driven by soaring inflation and a potential banking crisis.

In October, OPEC+, which includes the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, agreed to a cut of 2 million barrels per day (bpd) to a total of 31.22m bpd, despite US pressure to keep outputs higher to reduce oil prices. The decision, which helped push Brent close to $100 a barrel, was OPEC+’s largest supply cut since 2020. 

In mid-March a huge sell-off saw Brent crude drop to $77.06 per barrel, sparked by fears of higher inflation as well as the shutdown of Silicon Valley Bank and the near collapse of Credit Suisse. On March 21, Brent slumped to $70 amid the global economic uncertainty, its lowest level this year. 

The Joint Ministerial Monitoring Committee, which will meet virtually on Monday, has the power to call an emergency OPEC+ meeting if it thinks a change in production is necessary. But analysts have told Al-Monitor that they do not expect the panel to suggest an output adjustment.

Craig Erlam is a senior market analyst, UK & EMEA at OANDA. He told Al-Monitor, “The main reason why we shouldn’t expect any change [on Monday] is the outlook is extremely unclear right now and so making big changes doesn’t make sense. The more sensible approach is to allow the fog to clear and analyze the situation then.” 

Kurdish dispute

Analysts say that the disruption of Kurdish oil trade following a court ruling that halted the autonomous region’s oil exports to Turkey will likely support the committee's case against a downward adjustment. 

In a note shared this week, RBC Capital Markets said, “The disruption of 450 kb/d of Kurdish exports — following the international arbitration court ruling that Baghdad has sole control of the northern pipeline that transports crude to the Turkish port of Ceyhan — will also likely bolster the monitoring committee’s conviction that no downward adjustment is warranted at this time.”

It went on, “However, given that talks are ongoing between Ankara, Erbil and Baghdad to find a negotiated settlement to the pipeline and revenue sharing dispute, this outage may prove to be a short-lived.” 

On Friday afternoon, Brent crude was still hovering around $77 per barrel, but RBC said if macroeconomic fears return and oil tumbles, OPEC+, led by Saudi Arabia, will consider convening an off-cycle ministerial meeting to change output and stop prices from going into free fall. The next ministerial meeting is not scheduled until June. 

“If this week’s improving trend line continues there will be no reason to course correct, but we do not see the group remaining on autopilot until year-end if oil descends into another tailspin driven by broader macro/rate hike concerns,” RBS added.

Callum Macpherson, head of commodities at Investec, said it would be surprising if OPEC+ decided to cut output in the near future.

“Over the first quarter of this year, the market looks to have been well supplied, but I think there is a generally held view that this will change," he said. "In the second half of the year — unless OPEC+ increases output quite materially — the market is very likely to be under supplied.”

In its risk assessment of OPEC+ members, RBC said it saw an improvement in Saudi Arabia and Iran’s risk rating as a result of a China-brokered pact earlier this month that normalized relations between the two longtime foes. Libya’s risk rating was also lowered, as the analysts believe National Oil Corporation chair Farhat Bengdara has shown that he can work with all factions in war-torn country. 

'Undersupplied territory'

Giovanni Staunovo, a commodity analyst at UBS, also believes that the path of least resistance is to keep the production quota unchanged for now.

“There are demand concerns out of the US and Europe offset by prospect of stronger demand from Asia,” he said. “Oil prices are likely to decouple from those factors once the oil market shifts into undersupplied territory during the second quarter, which should allow prices to move higher.”

Livia Gallarati, senior analyst, oil markets at Energy Aspects, believes that current prices are not at the levels OPEC+ would like to see, but oil’s recent collapse was driven by factors outside the oil market. 

“Physical cuts could probably stabilize sentiment in the very near term but there is no guarantee that prices won’t fall again if the banking contagion spreads and there is a risk of cuts being misinterpreted as evidence of much worse economic problems or demand weakness, when in fact OPEC+ sees strong demand,” Gallarati said. 

She said that if necessary, the coalition will backstop the market as it has always done.

“In past years, we have seen the group mobilise to forestall any risk of the curve lurching into contango, but we are nowhere close to that,” Gallarati added.

Erlam said that the banking crisis is the main factor influencing the oil market right now, and it will need a few weeks if not months of calm for the major economic downside risk to fade. 

“That will be a key factor for the global economy too, while China remains a partial unknown, as is Russian output. There’s going to be many twists and turns this year.”

“China is clearly looking to grow its influence but if that comes at the expense of those with Washington, then it doesn’t strike me as a promising path forward, rather just an alliance of sanctioned and sanction-circumventing countries and a greater divide with the West,” Erlam added.

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