Stock - OPEC \ OIL
The Russia oil price cap is the additional factor that highly volatile markets need to process. Image Credit: WAM

The OPEC+ met on December 4 - one day before sanctions on Russian seaborne crude exports took effect - to determine production plans for the first-half of 2023. We continue to expect a rollover of December quotas, largely due to US pressure following the 2 million barrel a day headline cut on October 5, according to S&P Global Commodity Insights.

Therefore, the OPEC+ crude output ex-Russia remains largely flat between December and June, at which point our reference case assumes another 1 mbd quota reduction.

Given our expectation of stock builds through April and Saudi Energy Minister Prince Abdulaziz bin Salman’s affinity for catching speculators off-guard with bullish surprises. However, the recent rebound in Dated Brent toward $90/b likely reduces the urgency, which will keep Saudi supply at 10.4 mid to 10.5 mbd.

OPEC+ is not scheduled to meet again until June but could reconvene as soon as January to assess the impact of Russia sanctions and other market uncertainties.

While not our base case, we estimate that 1 mbd headline cut for H1-2023 would reduce actual supply by 450,000 bd, due to capacity constraints in most OPEC+ members and Iraq’s reluctance to voluntarily cut production under the new government. If OPEC+ shifts all country-level quotas to new baselines established in July 2021, the actual supply reduction from a 1 mbd cut would be just 290,000 bd.

The OPEC+ cut raises the odds of near-term US Strategic Petroleum Reserve releases, but the likely first step would be delivering 26 million barrels of Congressional sales in Fiscal 2023 (October 2022-September 2023). Fifteen million barrels of emergency sales remain to be delivered through December 31. Returns from recent exchange transactions will nearly offset Congressional sales in Fiscal 2023, and the Biden administration would begin buying back emergency sales around $70/b.

The Russia sanctions’ impact will be the biggest influence on the ‘call’ on OPEC in 2023. By call, we mean what OPEC would need to supply to meet demand. One potential complication to deeper OPEC+ cuts later in 2023 comes from ambiguity over timing of a planned shift to higher production baselines. A shift of each country’s entire quota to new baselines would create a one-time increase for the UAE, but also Saudi Arabia, Russia, Kuwait, and Iraq.

The OPEC+ has simply applied higher baselines to each country’s share of the monthly quota changes (instead of a proportionate share of the total OPEC+ quota, currently set at 40.1 million b/d).

A shift to the new baselines was not applied when OPEC+ extended the deal through December 2023 on October 5. However, the methodology eventually applies, as is likely, the largest impact would be on the UAE.

Specifically, we estimate that under our assumed 1 mbd OPEC+ headline cut for H2-2023. Applying the higher baseline will increase the UAE quota by 110,000 b/d over its current pledge. moving to the new baselines would reduce the odds of UAE objections...