In the last month, oil markets have been shaken by a war that has sparked a jump in prices and threatened a critical shortfall in crude and other petroleum products.
But when most of the world’s largest oil producers meet by teleconference on Thursday to discuss supplies, analysts don't expect much action. Officials from OPEC and Russia are likely to do little more than announce their usual modest monthly production increases, leading to questions about how much oil the group really does have in the tank.
Western sanctions imposed on Russia over its invasion of Ukraine are likely to lead to the loss of substantial quantities of both crude and oil products, especially diesel fuel, from the market. Already, major buyers of Russian oil, like Shell and TotalEnergies, have said they would gradually purge petroleum of Russian origin from their vast networks.
“These losses will be enduring as Russia will likely remain the most sanctioned country on earth for the foreseeable future,” wrote Helima Croft, head of commodities at RBC Capital Markets, an investment bank, in a note to clients on Wednesday.
Russia is one of the world’s top three oil producers, along with the United States and Saudi Arabia, and exports about eight million barrels a day in crude and products. The International Energy Agency, the Paris-based group, estimates that as much as 3 million barrels a day of Russian oil, or about 3 percent of world supplies, could soon be shut down in what “could turn into the biggest supply crisis in decades.”
Only Saudi Arabia and the United Arab Emirates could produce substantially more crude “that could help offset a Russian shortfall,” the agency said in its latest oil market report.
Yet these countries — the de facto leader of OPEC and a key ally — don’t seem inclined to act, a stance that seems puzzling given their longstanding security and commercial links to the West.
“The wider question is: Do even they face some technical obstacles” to bringing large additional volumes of oil online? said Richard Bronze, head of geopolitics at Energy Aspects, a research firm. Saudi Arabia says it has the ability to produce about 12.5 million barrels a day, more than 2 million barrels a day above recent output.
Certainly most members of OPEC Plus have already run out of firepower, as countries like Nigeria and Angola have been unable to keep up with recent targets. The group is likely to actually add only a small fraction of the output increase it announces Thursday, Mr. Bronze figures. Russia clearly won’t be able to increase production because it is already running out of storage tanks for unsold oil.
Moreover, the group is approaching the end, later this year, of unwinding the steep production cuts of early 2020 that helped bolster the market when demand and prices plummeted in the early days of the pandemic.
The Saudis and the Emiratis may figure that, with prices gyrating and the outcome of the conflict in Ukraine far from clear, now is not the time to unleash what resources they have left. While events like the lockdowns in China are probably reducing demand, oil consumption is still likely to be higher in the summer driving season and output may potentially be lower.
The fact that closing prices for Brent crude futures, the international benchmark, have swung in recent weeks from as high as nearly $130 a barrel to below $100 allows the group to argue, however unconvincingly, that geopolitics rather than shortfalls are adding a premium to the price and go on taking in huge volumes of cash.
“Current volatility is not caused by changes in market fundamentals but by current geopolitical developments,” the group said after its last meeting on March 2.
In addition, the International Energy Agency is in the early stages of coordinating a 60-million-barrel release of oil, announced on March 1, from the reserves of the United States and about two dozen other countries. These ongoing additions to supply reduce the incentive for OPEC Plus to try to influence the markets, analysts say.
Also, OPEC Plus does not seem ready to act against the interests of Russia, a co-chair of the group, which presumably would oppose an additional increase in production that would help countries live without Russian crude.
The United Arab Emirates, in particular, seems sympathetic to Russia’s concerns in the conflict with Ukraine and threatened by the prospect of democratic revolution that the Ukrainian government represents.
“There is an affinity for Russia and authoritarians in general” among the U.A.E.’s leaders, said Karen Young, a senior fellow at the Middle East Institute, a Washington-based research organization.
There has also been frustration voiced among OPEC Plus officials with being asked to solve what they viewed as problems created by poorly thought out Western policies on climate change. OPEC officials say they are being asked to increase output while, at the same time, Western governments and investors are leaning on energy companies to cut investments in oil and gas to meet climate goals.
The argument among many producing countries in the Middle East is that painfully high, oil and gas prices are the bitter fruit of trying to dispense with fossil fuels before sufficient alternative resources like wind and solar power are available.
“We cannot and must not unplug the current energy system before we have built a new one,” Sultan al Jaber, the chief executive of the Abu Dhabi National Oil Company, said at a recent Atlantic Council conference.
Yet there is little sign that the West is backing off on moving away from oil and gas, especially from potentially unreliable suppliers like Russia. In fact, Moscow’s use of energy to put political pressure on European countries may prove to be an incentive for Western countries to reduce consumption of fossil fuels faster. Germany, for instance, is moving fast to sever energy ties with Moscow, which has long been its key supplier.
“The urgent need to accelerate the equitable transition to clean energy remains a top priority, and must be accelerated,” Jennifer Granholm, the U.S. energy secretary, said last week.
The Saudis and the United Arab Emirates have other reasons not to rush to comply with Western requests. They are worried about intensifying missile attacks on energy installations and other targets in their countries by the Yemen-based Houthi group, and suggest that Washington is not doing enough to stop them.
Saudi Arabia recently warned that it would not be responsible if these incidents knocked out oil exports to the world. These countries are also skeptical of Washington’s efforts to restore the nuclear deal with Iran and, thus, allow Tehran to sell more oil. The Saudis blame Iran for supplying the Houthis with the missiles launched against them.
In the meantime, analysts say there is little reason to think that the current oil crunch won’t worsen as buyers shy away from Russian oil. “I am surprised at how low prices are,” said David Wech, chief economist at Vortexa, a data analytics firm.
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