As analysts warned of an imminent oil supply crisis, OPEC and its allies, including Russia, decided on Thursday to stick to their previously agreed plan of modest monthly increases. The group, known as OPEC Plus, said it would increase oil production by 432,000 barrels per day in May, up slightly from the usual 400,000 barrels per day increase on technical grounds.
In a press release after what was likely a very brief meeting, OPEC Plus reiterated its thinking from a month earlier. The group said that the outlook was for “a balanced market” and that recent price volatility was “caused not by fundamentals but by ongoing geopolitical developments,” which appears to mean the war in Ukraine.
In contrast, many analysts are warning that with low oil tanks, sanctions over the war in Ukraine and some sort of buyers’ strike against Russian oil, a major supply crunch could develop, slowing global economic growth and fueling inflation.
The OPEC Plus announcement came just before the White House unveiled plans to release up to 180 million barrels of oil from emergency reserves in response to rising oil prices and in anticipation of potential demand spikes or supply dips. White House officials said they expected other countries to announce additional contributions at a meeting of the International Energy Agency on Friday.
After months of unsuccessfully urging OPEC Plus to increase oil production to calm troubled markets, Washington appears to have decided to take charge.
“We know consumers need relief now, and that’s why the President acted,” said a senior administration official.
Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, likes to refer to OPEC as a sort of oil central bank that smoothes market fluctuations by adding and subtracting supplies, although analysts dispute how effectively it has played that role. However, in the current circumstances, OPEC Plus may not be able to act as Russia, while not a member of OPEC, has been an integral part and co-chair of the larger group since its inception in 2016.
Alexander Novak, Russia’s deputy prime minister, reportedly took part in Thursday’s conference call. A decision to increase oil production could have been viewed as Western support for Ukraine and detrimental to Moscow’s interests.
OPEC, of which Saudi Arabia is the de facto leader, appears to be trying to ignore the problem caused by Russia’s presence in the group. For example, OPEC’s latest oil market report, released in mid-March, projected that Russia’s oil production would be 11.8 million barrels per day in 2022, an increase of nearly 1 million barrels per day from 2021 levels.
Not reducing these estimates because of the war and sanctions “partly reflects political sensitivity to downgrade projections for Russia,” analysts at research firm Energy Aspects wrote.
The Russia-Ukraine War and the World Economy
Other analysts, including the International Energy Agency in Paris, are forecasting a significant drop in the order of 3 million barrels a day as sanctions take hold and companies like Shell and France’s TotalEnergies stop buying Russian oil. In particular, the supply of diesel fuel, which Russia exports in large quantities to Europe, is a source of concern.
And OPEC Plus doesn’t have much more oil to contribute to the world market. The group is already about 1.3 million barrels per day below its targets and is not expected to add anywhere near 432,000 barrels per day in May. Russia, for example, along with Saudi Arabia, is set to increase by more than 100,000 barrels per day to 10.5 million barrels per day; Because of the sanctions, it is very unlikely that Moscow will be able to increase production.
Analysts say only Saudi Arabia and the United Arab Emirates are capable of adding significant amounts of additional oil. Those manufacturers may hold back until it becomes clearer how much Russian production will be lost. Market observers also have doubts about how much oil they could quickly add.
News that the Biden administration would release 1 million barrels per day from US strategic reserves starting in May, comparable to about 1 percent of global production, could also encourage these countries to save their extra volume for a more opportune moment.