Senior Research Scholar, Columbia University, Center on Global Energy Policy
As OPEC and a set of additional oil producers meet this Wednesday, Aug. 3, the production agreement set in place in December 2016 between the so-called OPEC+ countries, most important among them Russia, is coming to a decision point. At a moment of extreme uncertainty on both global demand for oil in an expected recession and uncertainty on the ability of Russia to continue exports as European Union sanctions kick in and the cost of insuring seaborne deliveries increases, OPEC+ must decide whether it can hold together for longer and at what production targets. The track record for 2022 has not demonstrated production capacity at even agreed-upon lower targets for most of the OPEC members. Estimating the direction of volatility in oil demand is difficult, as is the estimation of available production that can get to market, with Iran and Russia creating substantial uncertainty.
OPEC reported members' production in June at 28.72 mb/d, about 0.23 mb/d higher than in the previous month. Saudi Arabia led the increase as its production picked up by 0.159 mb/d. In its last meeting held at the end of June, OPEC+ did not change plans. However, pressure from the United States and other Western countries to increase oil output continues, especially after President Joe Biden's visit to Saudi Arabia in mid-July. Saudi Arabia and the UAE are the key targets, as they alone have spare capacity (about 1 mb/d each).
Saudi Arabia is not expected to change course on its production strategy given its preference to keep some potential capacity in reserve in the event of unexpected outages, e.g., from an attack on domestic facilities, or because of Russian supply cuts.
Another moving target is Russian exports. There were substantial increases in Russian crude exports to India and China between March and June, but those numbers have since begun to decline. Russian production fell from over 11 mb/d in March to 10 mb/d in April following its invasion of Ukraine, but it has recently recovered to well above 10.5 mb/d. By early June, imports into China and India surged by around 0.5 mb/d and 0.8 mb/d respectively according to HSBC analysts, offsetting much of the withdrawal of other Western buyers.
Russian exports into China have risen from an average of around 1.6 mb/d in the six months prior to the Ukraine war to an estimated 2.1 mb/d in June, with seaborne exports now around 1 mb/d vs. a low of 0.6 mb/d in February. (Bloomberg, June 20, 2022) India imported only 0.1 mb/d of Russian crude in March, or ~2% of its total oil consumption. This increased to 0.24 mb/d in April (4.7% of the total) and 0.77 mb/d in May (15.2%) and 0.93 mb/d (18.4% of the total) in June.
OPEC+ spare capacity is difficult to assess, as ability to meet production targets even under the June-based agreement remains elusive.
Scenario 1:Global recession makes a substantial dent in oil demand, and the market is easily balanced without additional increases by OPEC+ members. In this scenario, we could see increasing price pressure depending on Russia's continued ability to export, especially to China and India, undercutting pricing from Saudi Arabia and other Gulf producers. This could lead to substantial downward swings in pricing. The tensions among OPEC+ producers in this scenario also increase, as Russia and Saudi Arabia more openly compete for market share. On the flip side, there become opportunities for synergies between Russian state firms and Gulf state energy firms, including asset sales and reduced rates of Russia's Arctic gas projects.
Scenario 2: Global oil demand continues to grow despite economic headwinds, and political obstacles to getting supply to market increase, from European sanctions on Russian oil to increased restrictions on Iranian output. The stresses on available production lead Saudi Arabia and the UAE to increase production and break the cycle of targets within the OPEC+ framework. This scenario seems unlikely but possible. It could also create new tensions in the Saudi-Emirati relationship as the two might have differing views on the acceleration of production in that scenario outside of OPEC+.
Scenario 3:Russian and Saudi cooperation via OPEC+ continues, and the EU and the United States see some advantages to continued Russian supply to global markets, despite reductions to Europe. This muddling-through scenario would see some recessionary downward pressure on demand but continued ability, with some increase in production from Saudi Arabia and the UAE, to meet a basic threshold of 100 mb/d global demand for the near term, with still some spare capacity among OPEC+ producers. Prices would moderate under $100 per barrel, and a possible JCPOA remains on the table without a flare-up in regional threats.
Conclusion - most likely scenario:
The most likely scenario is a muddling through until there is a political flare-up either on the eastern flank by Russia or in the Middle East caused by conflict with Iran. More importantly, there will need to be some recalibration in refined oil products and their availability, especially within the United States. An outage at a refinery in the United States or a global concern for heating oils in an early winter could raise the political issue and heighten tensions again between Saudi Arabia and the United States, especially as fuel costs will be a concern going into the November mid-term elections.
Karen E. Young is a senior fellow and founding director of the Program on Economics and Energy at the Middle East Institute. She was a resident scholar at the American Enterprise Institute, and taught courses on the international relations and economy of the Middle East at George Washington University and at the Johns Hopkins School of Advanced International Studies. Before joining AEI, she served as senior resident scholar at the Arab Gulf States Institute, a research and visiting fellow at the Middle East Centre of the London School of Economics and Political Science, and an assistant professor of political science at the American University of Sharjah in the UAE.
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