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OPEC+ quota rise eclipsed by Russia sanctions

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As expected, OPEC+ approved existing plans to raise June quotas by 432,000 b/d at its May 5 meeting. Since late 2021, OPEC+ production growth has lagged well behind quota hikes due to capacity constraints outside Saudi Arabia and the UAE, a trend that will continue. Excluding volatile output from Russia and Kazakhstan, we forecast average monthly OPEC+ growth of 160,000 b/d from May-July and increases to be capped below 100,000 b/d from August as Saudi output approaches historical highs above 10.7 million b/d.

By July, just 1.6 million b/d of OPEC+ spare capacity will remain, raising the importance of growing supply risks. Most notably, we forecast Russian crude output to fall another 1.9 million b/d in May-August, but our assumed Iran nuclear deal in June appears increasingly tenuous by the day. Talks are stuck over Iran’s demand for the US to remove the Iran Revolutionary Guard Corps' terror designation, raising the odds that 1.0 million b/d of assumed Iranian export growth by December could be removed from our forecast.

Libyan crude supply is likely up by roughly 150,000 b/d from recent lows of 600,000 b/d, but it remains well below 1.05 million b/d in February-March. In mid-April, protesters shut roughly 450,000 b/d throughout the country, but the western Sharara field is now producing 70,000 b/d and NOC “temporarily” lifted force majeure at the Zueitina port May 1 (typically 90,000 b/d). But the terminal only reopened to clear storage space, and the lack of a sustainable revenue-sharing deal with the eastern parliament and military commander Khalifa Hifter creates clear risks of more sustained disruptions.

SPR releases

A partial offset to supply losses comes from historically large Strategic Petroleum Reserve releases, which will average nearly 1.4 million b/d in May-October from the US and other IEA countries. Eventually, the 190 million barrel US emergency release will become a supportive market factor, but not within our short-term forecast. On May 5, the Biden administration announced plans to buy back the crude, and will solicit bids for 60 million barrels in the fall. However, does not plan to take deliveries until “prices are significantly lower, likely after FY 2023.”

As described in our April 28 World Oil Market Forecast, the Biden administration plans to deliver 190 million barrels of its ongoing SPR releases as an emergency sale, after the president declared a “severe supply interruption” on March 31. Current US law allows a theoretically unlimited drawdown in this circumstance but does not require or outline a clear path to repurchasing the crude.

The May 5 announcement provides more clarity on the administration’s plans and raises confidence that eventual repurchases could at least partially offset 266 million barrels of required congressional sales from fiscal 2023 to 2031. However, the ambiguity of the longer-term plans also creates the potential for eventual friction over funding between the president and Congress, which maintains power of the purse. Even if 180 million barrels of crude is repurchased “in future years” as stated, non-energy budgetary sales will reduce the SPR balance to 307 million barrels by 2031. This compares with 550 million barrels currently, and 695 million barrels in early 2017.

Proposed EU sanctions

On May 4, the EU proposed a near-complete ban on Russian oil imports by end-2022, while potential sanctions on shipping insurance could make it more difficult to reroute cargoes. The details remain under discussion, but clear EU urgency to wind down 3.6 million b/d of crude and product imports from Russia aligns with our forecast for production shut-ins to grow from 1.1 million b/d in April, to peak disruptions of 2.8 million b/d in August.

As reported by S&P Global Commodity Insights, the proposal envisions phasing out EU crude imports of 2.3 million b/d (2021 data) within six months, excluding a possible extension for 200,000 b/d to Hungary and Slovakia. Another 1.2 million b/d of refined product imports would cease by end-2022, while 700,000 b/d of total oil exports to the US have already halted and 200,000 b/d to the UK will wind down by the end of the year. Despite these outsized dislocations, the key to determining the level of eventual Russian production shut-ins will remain the volume of cargoes redirected to Asia and elsewhere.

Russia’s crude pipeline shipments over 1.5 million b/d heading east were largely maxed out even before the Ukraine attack, due to infrastructure constraints, but seaborne loadings from the Baltic and Black Sea have proven unexpectedly persistent. As we noted in a May 3 Spotlight, crude flows recovered in April on the back of sharply higher deliveries to India. However, exports should begin to fall by May 15, after which EU sanctions only permit “strictly necessary” transactions with Rosneft, Gazpromneft and Transneft.

The market impact from the EU import ban will hinge on implementation details, but the policy itself is unsurprising. More notable could be sanctions on shipping and insurance reportedly under discussion for implementation by early June, which would increase the difficulty of redirecting cargoes to willing buyers elsewhere. We currently forecast monthly Russian crude production drop-offs of 670,000 b/d in May, 400,000 b/d in June, and 350,000 b/d in each July and August. A slower (or faster) timeline is clearly realistic, depending on future sanctions details as the war in Ukraine continues to evolve.

We estimate Russian crude averaged 9.1 million b/d in April, down 1.0 million b/d from March and nearly 1.1 million b/d below February (the post-April 2020 high). The trajectory of future shut-ins will hinge in large part on the policy response from Western governments to developments in Ukraine. In a relatively surprising shift since the February 24 attack (when we initially expected minimal production shut-ins), the relevance of EU sanctions has surpassed that of US oil and financial restrictions in determining the overall impact on Russian supply.

Following any near-term agreement on oil import sanctions, the next shoe to drop comes from a May 16 EU ban on transactions with Rosneft, Gazpromneft and Transneft that are not “strictly necessary.” Legal ambiguity persists over which oil purchases will be permitted, but recent commentary from trading companies points to a notable fall in seaborne exports from the second half of May.

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