NEWS

OPEC’s crude production rose to a two-year high last month as Persian Gulf members followed through on a pledge to relieve tight global markets. The Organization of Petroleum Exporting Countries added 270,000 barrels a day in July, with group leader Saudi Arabia accounting for about two-thirds of the increase, according to a Bloomberg survey. OPEC and its partners have agreed to accelerate the return of the last of the supplies halted during the Covid-19 pandemic, as peak summer demand and global output disruptions push fuel prices to levels that threaten the global economy. The alliance meets on Wednesday to consider its next move.

While US President Joe Biden said he expected “further steps” from the Saudis after visiting the kingdom last month, Riyadh has been circumspect about its plans. Several OPEC+ delegates said the group may keep production steady when it calibrates September levels this week, conserving spare capacity in case it’s needed later. The survey indicates that Middle East members have done what they can to help so far. Saudi Arabia bolstered output by 180,000 barrels day to 10.78 million barrels a day in July, the highest since April 2020, and a level rarely seen in the kingdom’s decades as an oil exporter. The United Arab Emirates and Kuwait also added substantial volumes, the survey showed. Abu Dhabi raised output to 3.24 million barrels a day, or 113,000 a day more than permitted under the OPEC+ deal. Libya appeared to be on a tentative path to recovery following an aggreement to reopen its ports.

Off Target

The extra slug of crude from the Gulf helped compensate for setbacks elsewhere. The total 270,000-barrel-a-day hike represents about two-thirds of the increase OPEC should have made, according to its deal to fast-track the restart of offline supplies. Hobbled by inadequate investment, political instability and sanctions, most OPEC+ nations are lagging far behind their targets. Angola and Nigeria — two members suffering the most acute supply shortfalls — saw their output decline again in July, as did Iran, which remains locked in stalled nuclear talks to ease US sanctions on its energy trade. Whether the Persian Gulf heavyweights are prepared to do more to compensate for their struggling counterparts is unclear.

Delegates remain concerned by the threat to oil demand from a potential recession in the US, and the lingering impact of Covid-19 lockdowns in China. Holding output steady would also avoid a rupture with Russia, a critical member of the OPEC+ alliance, which faces oil sanctions over its invasion of Ukraine.

Bloomberg’s survey is based on ship-tracking data, information from officials and estimates from consultants including Rystad Energy AS, Kpler Ltd. and Rapidan Energy Group.

If the squeeze drags into the winter, it could leave the continent, traditionally Russia’s largest export market, desperately short of the fuel.

Publicly, Russia claims that technical issues like missing paperwork and turbine maintenance have forced it to slash supplies in recent weeks. But in reality, the Kremlin is using the disruptions in Nord Stream, its main remaining pipeline supplying Europe to raise the political heat on leaders there to reconsider the painful sanctions they’ve imposed and their support for Kyiv, the people said, speaking on condition of anonymity to discuss internal deliberations.

They expect the Kremlin and Gazprom, the state-run gas giant, to continue to find reasons to keep flows limited, preventing European customers from building up the supplies they need to meet demand in the winter. EU officials are already warning of major economic disruption if flows don’t resume and calling on consumers to slash use of the vital fuel.

Raising Stakes

The gas dispute is the latest raising of the stakes in the crisis over Russia’s invasion of Ukraine and shows the Kremlin’s willingness to forgo tens of billions of dollars in export revenues to further its geopolitical aims. Gazprom has analyzed the possible impact of a cutoff lasting into next year, according to a person familiar with the situation, and found ways to limit the financial damage thanks to surging prices and revenue so far this year.

Privately, some in the Kremlin expressed surprise that President Vladimir Putin hadn’t moved sooner to cut off gas flows given Europe’s imposition of sweeping sanctions on Russia and supplying of weapons to Ukraine, one of the people said. Russia, the people said, is using its energy leverage as a political tool to retaliate in kind.

n recent days, Russia’s public line has hardened.

Kremlin spokesman Dmitry Peskov Monday suggested that the problems at Nord Stream are linked to Europe’s imposition of sanctions over the war, warning Monday that while Russia is at the moment “not interested” in cutting off the gas this winter, “the situation may change.”

‘Idle Factories’

Dmitry Medvedev, a former president and Gazprom chairman and now a senior Kremlin official known mainly for his dyspeptic social media posts, went further Tuesday. “The blue-and-yellow hysteria,” he wrote, referring to the colors of Ukraine’s flag, “has caused severe diarrhea from the fear of freezing in their chilly homes, looking out frost-covered windows at idle factories.”

Europe is by far Russia’s largest export market for gas and the bloc depends on its eastern neighbor for about a third of its imports. EU countries Tuesday agreed on a plan to cut gas use by 15% this winter in preparation for further disruptions in supplies. A halt in flows to the EU could shave as much as 1.5% off EU GDP if the winter is cold and demand isn’t curtailed, according to the European Commission.

“Amid what amounts to a full-blown economic war between Russia and the West it’s hard to expect either side to stick strictly to previous agreements,” said Andrey Kortunov, head of the Kremlin-founded Russian International Affairs Council.

Political Pressure

“It’s not likely that Russia seriously hopes that energy problems will force a change in the EU’s stance on Ukraine,” he said.  “But theoretically it’s possible that accelerating internal difficulties will lead to changes in government in a number of European countries and the new leaders will be far more focused on domestic affairs and less so on Ukraine.”

The EU pact came a day after Gazprom announced it would limit flows via Nord Stream to only 20% of capacity, citing the need for routine maintenance on a turbine that feeds gas into the link. That followed Russian claims that it hadn’t received paperwork needed to reinstall another turbine, which was sent back from maintenance in Canada thanks to a special sanctions waiver.

The technical issues are real, according to one person familiar with the situation, but Gazprom could still ship higher volumes via Nord Stream by delaying planned maintenance of some turbines. That would pose additional risks to the pipeline’s operations, and Russia sees no reason to do that given Europe’s tough line on Ukraine, the person said.

“This could be counter-productive,” said Oksana Antonenko, director at Control Risks in London. Russia’s actions will accelerate EU moves to diversify away from Russian gas and deprive the Kremlin of a key market it won’t soon be able to replace, she said.

As prices have spiked, EU leaders have accused Russia of using gas as a political weapon. But after decades of reliance on the cheap fuel for heat, power generation and industry, the continent has few easily available alternatives.

Russia denies politicizing its fuel exports. It also has few quick options for diverting supplies, since the vast majority go through pipelines that take years to build. Flows to China have jumped this year but are still dwarfed by what Russia once shipped to Europe.

Oil rose as tight near-term supplies outweighed expectations of another rate hike this week and an eventual economic slowdown.

West Texas Intermediate rose 2.1% to settle above $96 a barrel. The Federal Reserve is expected to increase interest rates this week to slow down economic growth. Despite the gloomier outlook, crude markets are pricing in remarkable strength for physical barrels with some buyers in Asia paying premiums of more than $20 a barrel to secure certain crude grades. Nearby Brent futures are trading about $5 over the next month’s contract, indicating refiners are willing to pay up to secure supplies.

“Crude prices are showing signs of stabilization around the mid-$90s as the oil market still remains tight despite another wave of weakening economic data in the US and Europe,” said Ed Moya, senior market analyst at Oanda Corp. “Despite the growing risks of a severe recession, oil should see strong support at the $90 level over the short-term.”

Crude is still up around 25% for the year, although futures have given up most of the gains seen after Russia’s invasion of Ukraine in late February. The war has prompted many consumers to pivot away from Moscow, with Saudi Arabia and Iraq filling a large part of the gap in Europe. The US is championing a price cap on Russian crude to limit revenues flowing to the Kremlin to fund its invasion.

The oil market has experienced bouts of volatility, characterized by sharp swings and low liquidity, as investors juggle competing supply and demand outlooks.

“The key macro variable to watch for clues of future commodity price direction is core US inflation,” said Francisco Blanch, head of global commodities and derivatives research at Bank of America Corp. in a note to clients. “Should core surprise to the downside, a less aggressive tightening path could fuel a second round of commodity price inflation in 2023, although admittedly the reverse would also be true.”

Meanwhile, a segment of the massive Keystone pipeline that delivers Canadian crude to the key US storage hub at Cushing restored normal operations late Friday following a power disruption. Service was still subject to mid-month capacity reductions, according to a bulletin obtained by Bloomberg. A prolonged slowdown in operations could have resulted in a supply squeeze to America’s largest crude stockpile.