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Oil climbs as Opec+ sticks to output plans

The crude prices also rally on the European Union plans for new sanctions against Russia

Oil prices extended gains on Thursday on supply concerns after as major producers rebuffed consumer calls for a faster pace of output rises by sticking to a modest increase of 432,000 barrels per day from June.

Brent crude was up $1.59, or 1.4 per cent, at $111.73 a barrel by 1231GMT while US West Texas Intermediate crude rose $1.30, or 1.2 per cent, to $109.11 per barrel on Thursday. Both benchmarks gained more than $5 a barrel on Wednesday.

The crude prices also rallied because the European Union laid out plans for new sanctions against Russia, including an embargo on crude in six months. The 27-member EU bloc will phase out imports of Russian refined products by the end of 2022 in addition to impose a ban on all shipping and insurance services for transporting Russian oil.

Opec+, which comprises the Organisation of the Petroleum Exporting Countries, Russia and their allies, agreed to another modest monthly oil output increase, arguing that the producer group could not be blamed for disruptions to Russian supply.

Political power matters

Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said energy prices remain under a decent positive pressure as the European nations now consider walking away from the Russian oil as the next step of the economic sanctions that they impose on Russia as a result of the war in Ukraine.

“But the European decision is not Opec’s problem. Opec countries will stick to their plan to increase the daily output by around 430K barrels per day,” Ozkardeskay told Khaleej Times on Thursday.

On the other hand, she said the Opec countries haven’t been able to meet the daily quotas over the past couple of months, so it doesn’t really make sense to have quotas in place if the producer countries fall repeatedly behind their target.

“There is also a political power battle around oil supply, as Opec remains allied with Russia, and plays against the US will to increase the oil output. The OPEC countries are not willing to replace the Russian oil. Therefore, the OPEC decision ill only play a minor role in energy prices,” Ozkardeskay elaborated.

Oil to remain bullish

She said the war in Ukraine, the sanctions on Russian oil, combined to capacity restrictions, other disruptions like attacks and social unrest in oil producer countries and the lack of investment should continue increasing the gap between supply and demand and give investors enough reason to remain bullish in oil in the short to medium run.

“But, it also looks like the oil rally will likely remain capped below the $120/130 area, as above this price range, the slowing demand could also slow the rally. Therefore, levels we saw at the beginning of the Ukrainian war, may be the peak levels,” Ozkardeskay said.

In March, crude prices hit their highest since 2008 at more than $139 a barrel after Russia’s invasion of Ukraine exacerbated supply concerns that were already fuelling a rally.

EU oil embargo not priced in

Bjornar Tonhaugen, head of oil markets research at Rystad Energy, said the oil market has not fully priced in the potential of an EU oil embargo, so higher crude prices are to be expected in the summer months if it’s voted into law.

Callum Macpherson, head of commodities at Investec, said the planned EU oil embargo represents a massive logistical challenge for oil markets. “Rerouting Russian output from Europe to willing buyers in Asia, in the presence of sanctions, is already so challenging that even Russia has admitted its production will decline significantly.”

He said only Saudi Arabia and the UAE had capacity to lift supply significantly. “If they were to do so, the ensuing falling out with Russia could bring an end to Opec+.”

Opec Secretary General Mohammad Barkindo said on Wednesday it was not possible for other producers to replace Russian exports of more than seven million bpd. “The spare capacity just does not exist,” he said.

— muzaffarrizvi@khaleejtimes.com