OPEC+ Balancing Act: Auto Pilot Can’t Go Much Longer

The February OPEC+ meeting went off without a hitch, with members reiterating their prior plan to stay on track with the 400K/d production increase and doing so in “record time”. The quick agreement, reflecting the benefit of monthly meetings and forward guidance, may be one of the last such smooth meetings as OPEC+ run into the challenge of limited spare capacity and other long-term issues including uncertainty around the near-term fundamentals.

Overall, the outlook remains near-term bullish, but as macro forecasts weaken and demand destruction kicks in, along with lagged effect of somewhat stronger US production, oil prices are likely to weaken in the second half. This volatility and associated demand destruction – more for other goods rather than fuel and food, is likely to persist into 2023. 

OPEC+ will increasingly face challenges as more countries struggle to meet new targets, increasing the reliance on Russian and GCC supplies, but it will also leave the oil markets more vulnerable to geopolitical risks including the recurrence of some of the recent outages in Africa, pipeline issues elsewhere. The increasing concerns about energy security in the GCC (to Houthi attacks) are more likely to be managed. 

A more positive downside risk to markets would come from increased supplies including more modest ones from the US and a more extensive one from an agreement with Iran that could boost supplies by H2. Negotiators continue to talk but its not clear that the political concessions from either the US or Iran are ready. Its not all agreed until anything is agreed. Even though Iranian oil would provide a welcome respite for the US and EU contingency planning around Russian commodity supplies amid sanctions and counter-sanctions risk, the political pressure and constituencies in the US for tougher sanctions are only growing. 

Higher oil and gas prices are prompting some supply increases, including most notably in the US, where shale producers are finally shifting away from just adding more revenue, but the market assumptions on additions from the US in 2022 still look optimistic at least in the near-term. 

Overall, these risks add to some of the pressure on global growth, particularly in some of the larger emerging economies. Some of these weaker growth prospects are self-inflicted (Chinese zero covid policies) or are the result of excess withdrawal of stimulus, but overall many EM face stagnating growth. While few countries (outside of Europe and energy producers themselves) have the capacity to provide subsidies, these increased costs will weigh on balance sheets and reinforce weaker growth paths in many fuel importing countries – especially those that are also food importers – many in Africa and some in Latin America. 

While a broad debt crisis and wave of defaults is unlikely, in part due to the lack of massive debt and hot money flows and somewhat stronger external balance sheets, the growth crisis has increased – these pressures along with export restrictions and diversions will add volatility to key commodity markets and limit inflows to EM economies. 

Oil producing countries, especially those with ample foreign holdings will be better positioned, and should be able to weather the withdrawal of liquidity. This would normally include Russia were it not for the logical derisking associated with sanctions risk. 

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