Why oil could still hit $130 a barrel even if OPEC+ tries to make up lost Russia production

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Talking about a potential deal that would allow other OPEC + producers to fill the oil supply gap left by Russia has put a cap on oil prices, but much more would be needed to reduce them, analysts said.

“Exempting Russia from the OPEC + production agreement and allowing other producers such as Saudi Arabia to pump more could bring temporary relief to the market, but the lack of sufficient surplus capacity represents an increasingly binding limitation on a moment of resurgence of post-pandemic mobility, “he said. Edoardo Campanella, Milan-based economist at UniCredit Bank, in a note on Wednesday.

OPEC +, made up of 13 members of the Organization of the Petroleum Exporting Countries and 10 other major producers, including Russia, is due to hold a regular monthly meeting on Thursday. The Wall Street Journal reported on Tuesday that some OPEC members were exploring the idea of ​​exempting Russia from production targets.

OPEC + agreed last year to increase production in monthly increments, but Russian production is seen to fall by about 8% this year as a result of buyers’ sanctions and embargoes in response to the invasion. of Ukraine in late February, where fights remain. The Wall Street Journal article noted that there had been no formal push to exempt Russia and that it was unclear whether Moscow would accept the proposal.

Oil futures retreated from session highs to end mixed after Tuesday’s report. Crude oil futures were higher in Wednesday’s session, with Brent crude in August BRN00,
+ 2.03%

+ 2.03%,
the world benchmark index, up $ 2.02, or 1.7%, to $ 117.62 a barrel on ICE Futures Europe. West Texas Intermediate Crude for July Delivery CL.1,
+ 2.08%

+ 2.08%,
the US benchmark rose $ 1.8 per barrel to $ 116.67 a barrel on the New York Stock Exchange.

U.S. equities were in nursing losses to begin in June, with the Dow Jones Industrial Average DJIA,
a drop of about 330 points, or 1%, while the S&P 500 SPX,
down 1.1%.

An exemption from production increases would reflect the fact that Russia is unlikely to be able to increase production due to sanctions on oil exports from the United States, the United Kingdom and, as of this week, EU countries. European, said Robbie Fraser, global research manager. and analytics, to Schneider Electric, in a note.

“While Russian production has proven to be somewhat resilient so far, production is expected to decline in the coming weeks and months,” he wrote. “This could lead Russia to a status similar to that of countries like Libya or Iran that have even been left out of coordinated production efforts due to a mixture of political unrest and international sanctions.”

But OPEC +, which has been increasing production targets in monthly increments of 430,000 barrels a day, has continued to struggle to achieve them. Analysts have blamed the lack of overcapacity in much of the region due to years of low investment.

Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, warned in May that the world “is running out of energy capacity at all levels,” according to the news.

Meanwhile, the oil market remains extremely tight, said Campanella of UniCredit, a situation not helped by the inability of OPEC + to achieve its goals. This will only get worse as Russian production falls (see chart below).

UniCredit Bank

Taking into account Russia’s production losses and assuming that the remaining barrels of other OPEC + countries remain unchanged would leave the cartel below its target of about 4.5 million barrels a day in July, he loved. In other words, the production of OPEC + would be the same as last August. In fact, it will probably be lower, the economist said, because with the exception of Saudi Arabia, the United Arab Emirates and Iraq, all other OPEC + producers have almost no surplus capacity and could not increase. production as much as necessary over the next two months.

Campanella said an agreement to exempt Russia from the deal on Thursday would likely have a negative short-term effect on crude oil prices, but is unlikely to last. He argued that simply removing OPEC + quotas and a renewal of Iran’s nuclear deal would be enough to bring the market back into balance.

That’s how math works, Campanella said.

In general, the spare capacity of OPEC + (formerly Russia) is 4.2 MB / d. If it were fully launched overnight (practically complicated), it would hardly make up for the missing barrels planned for July … But at that time, OPEC + could no longer add additional barrels, as it will have exhausted all its capacity. production. Given that global demand is expected to increase by 2.2 mb / d during 2H22 and that non-OPEC + production will increase by around 1.3 mb / d, then the world would be below 1 mb / d. Only a quickly signed Iranian nuclear deal could make up for the deficit and rebalance the market.

This reality, combined with the possible negative outbreaks of the war between Russia and Ukraine in the natural gas market as winter approaches, means that the risk of Brent remaining within the trade range between 115 and 125 dollars a barrel over a longer period has increased substantially. , along with the potential to raise the barrel to $ 130 a barrel, Campanella said.

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