Vienna (Reuters) - For OPEC watchers, every little detail matters.
When the oil producer group holds its half-yearly meetings, what time the ministers arrive in Vienna, how they speak and which hotel they stay in - anything will be analysed in an attempt to predict its policies.
So it was seen as a sign that new Saudi Energy Minister Khalid al-Falih takes OPEC seriously when he turned up in the Austrian capital on Monday, three days before the Organization of the Petroleum Exporting Countries' upcoming discussions.
But Falih will have little opportunity to see fellow ministers ahead of Thursday's meeting. Many of them, including those from Iran and Venezuela, won't show up in Vienna until midday or even late on Wednesday.
For veteran OPEC watcher Gary Ross, founder of New York-based consultancy PIRA, that signals expectations should be low as far as OPEC policy is concerned.
"These guys are not exactly getting along these days," Ross said. "OPEC is becoming far less important. We are entering an era when market management will be non-existent".
One exception to the later arrivals was UAE Oil Minister Suhail bin Mohammed al-Mazroui, who told journalists in Vienna on Tuesday that he was happy with the oil market, suggesting OPEC should refrain from action at this week's meeting.
"We need to wait. The market will fix itself to a price that is fair to the consumers and the producers," Mazroui said.
"This year is a year of correction. The rules of the market, that is supply and demand, are working and I think that is the essence of this policy."
OPEC last decided to change output in December 2008, when it cut supply amid slowing demand due to a global financial crisis. By contrast, between 1998 and 2008, OPEC made 27 changes to output.
For decades, Saudi Arabia, Vienna-based OPEC's largest producer and de facto leader, had a preferred range for oil prices and, if unhappy, would try to orchestrate a group-wide production cut or increase.
But a technology-driven spike in non-OPEC output such as that of U.S. shale and growing fuel efficiency led Riyadh to conclude that the era of fast oil growth might be ending.
In the past two years, Riyadh has stuck to a strategy of fighting for market share, thinking that pumping more oil now at low prices is better than producing less in the future.
"We think continuity will carry the day at the June OPEC meeting in Vienna. The only real uncertainty is how divisive the meeting will be and how much discord will be put on public display," said Helima Croft, head of commodity strategy at RBC Capital Markets.
FIGHT FOR SHARE
Unlike his predecessor, Saudi oil minister Ali al-Naimi, Falih has a much larger portfolio overseeing energy, industry, mining, atomic power and renewables.
On Tuesday, Falih visited OPEC headquarters to meet Secretary-General Abdullah al-Badri, staying for 90 minutes in a clear display that despite being a busy man, he has time for the producer group.
"There are times when you need OPEC and when you don't. You only need OPEC when you have major oversupply and OPEC doesn't want prices to crash any further," Ross said.
Oil prices have recovered to around $50 (£34.5) per barrel in recent weeks from their lowest in a decade of $27 per barrel in January - but are still far below the $115 seen in June 2014.
Prices crashed after Saudi Arabia increased production to an all-time high to fight for market share with higher-cost producers, including U.S. shale firms.
The drop in prices also badly hurt fellow OPEC members, with production declining from Nigeria to Venezuela.
Iraq and Iran, however, kept pushing production higher as Baghdad sees recent investments by oil majors pay off and Tehran regains market share after the lifting of some Western sanctions in January.
Falih's ultimate boss, Saudi Deputy Crown Price Mohammad bin Salman, has said Saudi Arabia may raise production further if other members don't restrain their output increases.
"As long as Mohammed bin Salman is in charge, I don't think anything reasonable (OPEC action) can happen. This policy has hurt not only the exporting countries, but companies and the industry," a non-Gulf delegate said.
By Alex Lawler, Rania El Gamal and Reem Shamseddine
(Additional reporting and writing by Dmitry Zhdannikov; Editing by Dale Hudson)
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It was shaping up to yet another dull OPEC+ meeting. Cut and dry. Copy and paste. Rubber-stamping yet another monthly increase in production quotas by 432,000 b/d. Month after month of resisting pressure from the largest economies in the world to accelerate supply easing had inured markets to expectations of swift action by OPEC and its wider brethren in OPEC+.
And then, just two days before the meeting, chatter began that suggested something big was brewing. Whispers that Russia could be suspended made the rounds, an about-face for a group that has steadfastly avoided reference to the war in Ukraine, calling it a matter of politics not markets. If Russia was indeed removed from the production quotas, that would allow other OPEC+ producers to fill in the gap in volumes constrained internationally due to sanctions.
That didn’t happen. In fact, OPEC+ Joint Technical Committee commented that suspension of Russia’s quota was not discussed at all and not on the table. Instead, the JTC reduced its global oil demand forecast for 2022 by 200,000 b/d, expecting global oil demand to grow by 3.4 mmb/d this year instead with the downside being volatility linked to ‘geopolitical situations and Covid developments.’ Ordinarily, that would be a sign for OPEC+ to hold to its usual supply easing schedule. After all, the group has been claiming that oil markets have ‘been in balance’ for much of the first five months of 2022. Instead, the group surprised traders by announcing an increase in its monthly oil supply hike for July and August, adding 648,000 b/d each month for a 50% rise from the previous baseline.
The increase will be divided proportionally across OPEC+, as has been since the landmark supply deal in spring 2020. Crucially this includes Russia, where the new quota will be a paper one, since Western sanctions means that any additional Russian crude is unlikely to make it to the market. And that too goes for other members that haven’t even met their previous lower quotas, including Iraq, Angola and Nigeria. The oil ministers know this and the market knows this. Which is why the surprise announcement didn’t budge crude prices by very much at all.
In fact, there are only two countries within OPEC+ that have enough spare capacity to be ramped up quickly. The United Arab Emirates, which was responsible for recent turmoil within the group by arguing for higher quotas should be happy. But it will be a measure of backtracking for the only other country in that position, Saudi Arabia. After publicly stating that it had ‘done all it can for the oil market’ and blaming a lack of refining capacity for high fuel prices, the Kingdom’s change of heart seems to be linked to some external pressure. But it could seemingly resist no more. But that spotlight on the UAE and Saudi Arabia will allow both to wrench some market share, as both countries have been long preparing to increase their production. Abu Dhabi recently made three sizable onshore oil discoveries at Bu Hasa, Onshore Block 3 and the Al Dhafra Petroleum Concession, that adds some 650 million barrels to its reserves, which would help lift the ceiling for oil production from 4 to 5 mmb/d by 2030. Meanwhile, Saudi Aramco is expected to contract over 30 offshore rigs in 2022 alone, targeting the Marjan and Zuluf fields to increase production from 12 to 13 mmb/d by 2027.
The UAE wants to ramp up, certainly. But does Saudi Arabia too? As the dominant power of OPEC, what Saudi Arabia wants it usually gets. The signals all along were that the Kingdom wanted to remain prudent. It is not that it cannot, there is about a million barrels per day of extra production capacity that Saudi Arabia can open up immediately but that it does not want to. Bringing those extra volume on means that spare capacity drops down to critical levels, eliminating options if extra crises emerge. One is already starting up again in Libya, where internal political discord for years has led to an on-off, stop-start rhythm in Libyan crude. If Saudi Arabia uses up all its spare capacity, oil prices could jump even higher if new emergencies emerge with no avenue to tackle them. That the Saudis have given in (slightly) must mean that political pressure is heating up. That the announcement was made at the OPEC+ meeting and not a summit between US and Saudi leaders must mean that a façade of independence must be maintained around the crucial decisions to raise supply quotas.
But that increase is not going to be enough, especially with Russia’s absence. Markets largely shrugged off the announcement, keeping Brent crude at US$120/b levels. Consumption is booming, as the world rushes to enjoy its first summer with a high degree of freedom since Covid-19 hit. Which is why global leaders are looking at other ways to tackle high energy prices and mitigate soaring inflation. In Germany, low-priced monthly public transport are intended to wean drivers off cars. In the UK, a windfall tax on energy companies should yield US$6 billion to be used for insulating consumers. And in the US, Joe Biden has been busy.
With the Permian Basin focusing on fiscal prudence instead of wanton drilling, US shale output has not responded to lucrative oil prices that way it used to. American rig counts are only inching up, with some shale basins even losing rigs. So the White House is trying more creative ways. Though the suggestion of an ‘oil consumer cartel’ as an analogue to OPEC by Italian Prime Minister Mario Draghi is likely dead on arrival, the US is looking to unlock supply and tame fuel prices through other ways. Regular releases from the US Strategic Petroleum Reserve has so far done little to bring prices down, but easing sanctions on Venezuelan crude that could be exported to the US and Europe, as well as working with the refining industry to restart recently idled refineries could. Inflation levels above 8% and gasoline prices at all-time highs could lead to a bloody outcome in this year’s midterm elections, and Joe Biden knows that.
But oil (and natural gas) supply/demand dynamics cannot truly start returning to normal as long as the war in Ukraine rages on. And the far-ranging sanctions impacting Russian energy exports will take even longer to be lifted depending on how the war goes. Yes, some Russian crude is making it to the market. China, for example, has been quietly refilling its petroleum reserves with Russian crude (at a discount, of course). India continues to buy from Moscow, as are smaller nations like Sri Lanka where an economic crisis limits options. Selling the crude is one thing, transporting it is another. With most international insurers blacklisting Russian shippers, Russian oil producers can still turn to local insurance and tankers from the once-derided state tanker firm Sovcomflot PJSC to deliver crude to the few customers they still have.
A 50% hike in OPEC’s monthly supply easing targets might seem like a lot. But it isn’t enough. Especially since actual production will fall short of that quota. The entire OPEC system, and the illusion of control it provides has broken down. Russian oil is still trickling out to global buyers but even if it returned in full, there is still not enough refining capacity to absorb those volumes. Doctors speak of long Covid symptoms in patients, and the world energy complex is experiencing long Covid, now with a touch with geopolitical germs as well. It’ll take a long time to recover, so brace yourselves.
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