Market Close: June 02 Up

Before Thursday’s OPEC+ meeting, oil had fallen on reports that Saudi Arabia and other members were prepared to fill the gap in the market created by Western sanctions on Russian oil, or even remove the country from the OPEC+ quota system altogether. Russia’s output has already fallen by about 1 million barrels a day since the start of the war and may drop further after the European Union agreed further sanctions on its oil. The policy shift eventually agreed upon by the Organization of Petroleum Exporting Countries and its allies was far less dramatic. The group approved oil-production hikes of 648,000 barrels a day for July and August, about 50% larger than the increases seen in recent months. Moscow gave the plan its full backing and talks were concluded in just 11 minutes, delegates said, asking not to be named because the information was private. The deal was “a pretty minor tweak,” said Farren-Price. Given the cartel’s recent struggles to hit its production targets, several analysts predicted that the additional volumes that would actually reach the market would be much smaller than the headline figure.

US Pressure

Opening the taps even just a little wider is still a turnaround for Saudi Arabia. The kingdom doggedly stuck to the OPEC+ plan for gradual monthly supply increases even after Russia’s invasion of Ukraine upended global markets and sent energy prices soaring. Last week, the Saudi foreign minister said there was nothing more the country could do to tame oil markets, and even suggested there was no shortfall of crude.

Thursday’s shift suggests that political pressure from the White House is bearing fruit. Joe Biden is likely to visit Saudi Arabia later this month, according to people familiar with the matter, a trip that would almost inevitably include a meeting with the kingdom’s effective ruler, Crown Prince Mohammed Bin Salman. The US president blames him for the 2018 murder of a US-based columnist, but with record high gas prices weighing on his party’s political prospects, pressure has grown on Biden to repair relations. “The United States welcomes the important decision from OPEC+ today to increase supply,” said White House Press Secretary Karine Jean-Pierre. “We recognize the role of Saudi Arabia as the chair of OPEC+ and its largest producer in achieving this consensus.”

The OPEC+ output increase will be divided proportionally between members in the usual way. Countries that have been unable to raise production, such as Angola, Nigeria and most recently Russia, will still be allocated higher quotas, meaning the actual supply boost may be smaller than the official amount — as has often been the case in recent months. Will the target increase actually translate into a meaningful uptick in the number of real barrels reaching the oil market?” Giovanni Staunovo, a strategist at UBS Group AG, wrote in a note. He estimated that “effective production increases will likely be about half of the target.”

Only Saudi Arabia and the United Arab Emirates have enough spare capacity to offset a significant portion of the supply gap created by sanctions on Russia. Much of that will remain untapped even after the July and August production increases, setting up a crucial OPEC+ meeting in two months that could determine whether the US and Europe persuade their Gulf allies to break further from Moscow.

“This does lay the groundwork potentially for a Biden visit at the end of the month, and maybe we could see some further increases from September onwards,” Amrita Sen, co-founder and research director at Energy Aspects Ltd., said in an interview. At the same time, “OPEC+, and particularly Saudi Arabia, want to continue with the group.”