The OPEC+ alliance has already set its production quotas for August. Nevertheless, faced with soaring market prices, OPEC+ is under pressure from consumer countries to increase its production capacity. A tense international context adds uncertainty to the long-term evolution of the market.
Consumer pressure on OPEC+.
First, OPEC+ has been facing pressure from oil consuming countries for months. The latter are demanding that the members of the alliance increase their crude oil production. Thus, the President of the United States, Joe Biden, will make a crucial trip to Saudi Arabia. He will seek commitment from the country and its OPEC+ allies and continue to increase crude production to cope with high prices.
Matt Reed, vice president of Foreign Reports, sees the timing of Joe Biden’s visit as an opportunity.
“Mr. Biden’s trip is timely if they want to discuss what happens after the OPEC+ agreement expires at the end of August.”
Second, OPEC+ ministers meet on June 30. They will discuss short and long term market developments. One of the decisions taken will be to bring production back to pre-pandemic levels in August. However, the beginnings of a new production agreement, when they meet a few weeks after Mr. Biden’s trip, could emerge. OPEC+ knows it holds the cards when it cites the challenges of a rapidly changing market. In fact, high crude prices are a boon for the alliance.
“The Saudis have to believe that the market needs this oil. That’s far from certain when everyone is getting nervous about a recession. “
Long-term market uncertainties
First of all, there is the tightening of sanctions by the European Union (EU) against Russian oil flows. The ban on most imports by the end of the year should tighten global supply. In addition, with the summer season in the northern hemisphere, demand increases. Added to this are growing concerns about a global recession. This climate of uncertainty has contributed to price volatility in the market in recent weeks. It is for these reasons that OPEC+ must decide whether to put more oil on the market.
Secondly, there have been disruptions affecting key producers in recent months. This is particularly true of Libya, Kazakhstan and Nigeria. An OPEC+ delegate said that it is difficult to make projections on the market because of its unpredictability.
“In today’s environment, conditions change every day. “
Finally, there is the issue of Iran. In the event of an Iranian nuclear deal, for which European officials are redoubling their efforts, significant volumes of Iranian crude could be unlocked.
Political commitments expected
Officially, OPEC+ is keeping the August quotas in place until the end of 2022. Any changes would require the approval of all 23 members of the alliance. This is why the OPEC+ Ministerial Follow-up Committee on June 30 is important, as it determines the recommended policy changes.
De facto, the focus is on Saudi Arabia and the United Arab Emirates (UAE). They are the only ones with significant spare production capacity. Platts Analytics estimates that by September Saudi Arabia could supply 460,000 b/d while the UAE will be able to increase its production by 660,000 b/d. Utilizing these reserves would meet the expected increase in demand during the summer, but this leaves a precarious margin to meet any interruption in global supply.
In addition, OPEC+ officials insist that their decisions reflect their assessment of the market. Nevertheless, there are political elements that could change their usual doctrine. Saudi Arabia and the UAE are pressuring the U.S. to increase security in the region. Thus, several attacks by the Iranian-backed Yemeni Houthi rebels have taken place against oil infrastructures in the region.