At last week’s meeting, the OPEC+ group agreed to increase production for July and August by 216,000 barrels a day to 648,000 barrels, instead of the earlier 432,000 bpd threshold, thus doing its part to ease pressure on oil prices that have stabilized at high levels in recent weeks.
The most important point is to what extent this decision would affect supply levels and, by extension, oil prices? Technically, this increase does not seem to have had any significant impact on prices for now.
First, the problem of supply shortages is not related to the volume of crude oil production, but on oil derivatives resulting from the closure of many refineries during the pandemic, which led to severe shortages in gasoline and other derivatives. Increasing crude oil production without having enough refineries at work is a decision that will not have any significant supply-side effects.
Secondly, the increase in output to 648,000 barrels per day will not compensate for the expected decline, whether from Russian production or from other countries, some of whom suffer from geopolitical turmoil, or have environmental and technical problems to resolve. The actual OPEC+-mandated increase will be much lower, as happened last April, when production did not exceed more than 10,000 barrels, although the decision was to increase production by 400,000 barrels per day.
No easy filling Russia void
Third, Russia’s crude oil exports of 5 million barrels per day, about 80 per cent of which go to European countries, cannot be compensated for easily. If oil derivatives are added to these exports, their volume to Europe will rise to 6 million barrels as before the Ukrainian war, indicating a small increase compared to the volume of Russian exports.
Therefore, raising the monthly increase rate by 50 per cent in July and August to 648,000 barrels is more psychological than practical and has had some temporary effects. Speculators have benefited in the main; as soon as the increase was announced, Brent crude prices fell from $124 to $113, and shot up to $120 at the beginning of this week.
Through the media, attempts have been made to break up the OPEC+ grouping by saying that the increase was decided within OPEC and not OPEC+, which also includes Russia. The attempt to split the ranks of this powerful alliance has been there since the beginning of the Ukraine crisis, and included the activation of the ‘No Oil Producing and Exporting Cartels Act’ passed by the US Congress.
Divide policy will not work
These attempts appear to have not succeeded, as the countries that agreed to increase production are working closely with all other OPEC+ members, including Russia, as everyone knows that this increase will not solve the problem of oil supplies and prices.
Also, all members are fully aware of the importance of OPEC+ group to maintain their gains and stabilise oil markets. Without this alliance, oil-producing countries will be at risk of losing most of their gains.
None of this is new, other than the media hype and the gains made by speculators. Solving the crisis effectively needs more than an agreement on production increases, but which do not lead to the resolution of technical and geopolitical issues surrounding the crises, which could worsen further.
