Rystad Energy: Oil Prices on Waiting Mode as OPEC+ Meeting Expected to Ratify Another Planned Supply Increase
The oil market will be waiting for hints from today’s OPEC+ meeting and pricing is cautious as traders brace for the output policy decision for the upcoming month of March.
As there hasn’t been much talk of any unexpected change in the mindset of OPEC+, prices aren’t moving much for the moment, with the group expected to ratify another 400,000 barrels per day increase in the collective target production.
Prices are far-far above breakeven prices for marginal supplies from anywhere from the US shale patch to offshore, not to mention onshore fields in the Middle East.
From an operator’s economical perspective, investments and supply should see a positive jolt some months down the line this year and into the next.
But there are concerns in the market, partly priced in, that OPEC+ will not be able to produce what they say in the future. There is anxiety about damage to production capacity from Saudi Arabia to Kuwait and Russia, from too low investments during the pandemic and before.
However, validating any production lag by OPEC+ is impossible before the spare production capacity is actually put to the test.
Looking back, we find that OPEC+ has failed to live up to its own pledge of increasing production according to plan, and the group is now trailing its “target production” in January by around 700,000 bpd as Nigeria, Angola, even Russia, and some other smaller producers are lagging their own production targets. Supply disruptions in Nigeria, which produces a lot of “swing barrels” with ideal composition in the current market for refiners, are particularly problematic and support the overall sweet crude markets which now show close to record-strong premiums in prices.
Needless to say, the market will be closely watching today’s decision, and – although not OPEC’s usual cup of tea – we should not rule out completely a surprise outcome where OPEC+ decides to boost production targets by even more than the 400,000 bpd.
Nevertheless, the group will most likely opt for the scheduled 400,000 bpd increase for March, which is largely priced in by the market.
The market is rightfully concerned about supply-demand balances for crude oil into the spring months, especially now that the Omicron risk seems to be fading slowly.
OPEC+ supply growth is key to delivering on the crude supply the market expects will be needed to meet demand in the second quarter.
While the jury is out on the actual spare capacity of OPEC+, the market is not convinced the capacity actually exists until it is proved, and it falls on OPEC+ and Middle East producers to deliver.
Today’s OPEC+ meeting will provide some clues, but the availability of increased export cargoes for March-April will be more persuasive and influence prices more than words by the cartel today.
