IEA Stock Release And Opec+ Modest Increase Fail To Halt Oil/Gas Price Rally

IEA Stock Release And Opec+ Modest Increase Fail To Halt Oil/Gas Price Rally

This year will mark the 25th anniversary of the St Petersburg International Economic Forum, a gathering that is normally held in a village-like enclosure in this imperial city that is incidentally also the birthplace of Vladimir Putin. Billed by its organizers as one of the world’s largest business events, it has been an annual an event that attracted business and energy leaders from around the world. Putin, in his capacity either as Russian President or Prime Minister, whichever role he has occupied at any given time in the last two decades, made a point of making an appearance. This year’s conference and exposition, which the event’s website says is due to be held from 15-18 June, is likely to be a bust.

A wave of sanctions have been imposed on Moscow over its invasion of Ukraine and the world’s largest multinational energy companies have announced plans to divest from Russia.

One of the most anticipated sessions was always the special discussion dedicated to energy, which Putin used to chair. On one occasion, attendees headed for the auditorium where the energy session was due to be held. Among them were the CEOs of Total, Shell, ConocoPhillips, BP, Vitol, the Executive Director of the IEA and a handful of energy ministers. They all huddled together, exchanging pleasantries and checking their watches as they waited for Putin to arrive. Two hours later, he turned up, having upset the dinner plans of attendees, some of whom had been due to go to the ballet or a river cruise hosted by the city’s mayor. Executive jets missed their takeoff slots, prompting one company CEO to declare that “the combined wealth of the companies represented by the people in this room is more than the GDP of Russia.” Yet they all waited despite the inconvenience. Putin had apparently been watching a judo match, hence his tardiness. (The International Judo Federation announced this week that it had suspended Putin as honorary president)

Russia may be one of the top three crude oil producers in the world and the leading producer and exporter of gas yet its economy, as one analyst recently noted, is smaller than Italy’s. Official data shows that GDP per capita in Italy at $32,000 for 2020 was three times Russia’s. But when it comes to energy, Russia matters. That is why the spate of sanctions so far have not directly targeted oil and gas exports though these have been impacted by the financial and banking sanctions. Reputational and legal risk has deterred buyers of Russian crude oil though natural gas is still flowing through Ukraine and other pipelines to Europe. Germany is particularly vulnerable to possible interruptions in Russian oil and gas supplies (Does Russia Have Germany Over A Barrel?).

Crude oil prices, which were on the rise before the Russian invasion of Ukraine, climbed to new highs on Wednesday (Opec+ Intends To Stick To The Plan Despite $100 Oil). Global benchmark Brent futures traded above $113/B, up 8.5% on the day, while European gas futures surged to a new record. The IEA’s announcement that its 31 members had agreed to release 60 million barrels of oil from emergency reserves, failed to turn down the heat since it represents less than a day’s worth of global demand. The IEA did leave open the possibility of further stock draws if needed. Wednesday’s decision by the Opec+ producers led by Saudi Arabia and Russia to maintain the gradual easing of supply cuts at 400,000 b/d into April, was also seen as bullish.

A statement at the end of the monthly Opec+ ministerial meeting, held virtually, made no mention of the IEA’s stock release or the war in Ukraine, saying that “current market fundamentals and the consensus on its outlook pointed to a well-balanced market, and that current volatility is not caused by changes to market fundamentals but by current geopolitical developments.”

The IEA’s February Oil Market Report expects oil demand in 2022 to reach 100.6mn b/d and, while it pointed to the inability of some Opec+ producers to meet higher output targets, it still expects a supply surplus this year. “Chronic underperformance by Opec+ in meeting its output targets and rising geopolitical tensions have propelled oil prices higher,” the IEA said in the report, which was published before Russian troops crossed into Ukraine. It noted that benchmark crude prices rose by more than 15% in January to cross the $90/B threshold for the first time in seven years as global stocks had fallen to multi-year lows and spare capacity was eroding. Should the gap between Opec+ output and target levels continue, which the IEA put at 900,000 b/d in January, it would lead to more volatility and upward pressure on prices, it said. These risks, “could be reduced if producers in the Middle East with spare capacity were to compensate for those running out,” the IEA said.

That does not appear to be a message that Opec+ and particularly top exporter Saudi Arabia are likely to heed. So far, Riyadh has turned a deaf ear to US calls to increase supply to the market and Saudi Minister of Energy Prince Abdulaziz bin Salman has made clear that there will be no unilateral action to make up for shortfalls from other members. Yet Saudi Arabia and the UAE are the key Opec producers with substantial spare production capacity that can be brought on line within three months, if required, and both are investing in new capacity (Aramco Capacity Expansion: First Gains From 2025). Both are US allies but have forged closer ties with Russia in recent years in the energy, economic and broader trade sphere: they find themselves navigating a delicate path between the two. It is worth noting that Putin spoke to the UAE’s de-facto leader Sheikh Mohammed bin Zayed before the Opec+ meeting and agreed to continue coordination in global energy markets.

It’s too early to tell if the departure of the multinationals will have an impact on Russia’s oil and gas production capacity in the near future. But already Russia is nearing its capacity limits and January production of 10.04mn b/d was below target for the second month in a row, the IEA said in its February report. Under the Opec+ agreement of July 2021, Russia’s Opec+ baseline is set to rise to 11mn b/d in May this year, as is Saudi Arabia’s (Opec+ Starts 2022 With Agreement To Further Ease Cuts). But while Riyadh has the capacity to produce at that level, Moscow does not.

The IEA puts Russia’s sustainable production capacity at 10.2mn b/d and Saudi Arabia’s at 12.2mn b/d, leaving Russia with just 100,000 b/d of short-order spare capacity and 200,000 b/d of 90-day capacity compared with Saudi Arabia at 1.2mn b/d and 2.1mn b/d. The UAE could bring on an additional 1.2mn b/d within 90 days, Iraq perhaps 600,000 b/d and Kuwait 200,000 b/d, according to the IEA’s estimates.

The impact on Russia’s economy so far has been severe. The rouble has crashed to a record low against the dollar, the stock market remains closed and foreign investors are withdrawing in droves. Higher oil and natural gas prices may provide some temporary relief to Russia and other oil and gas producers but the longer term costs may be high. An accelerated move to alternative sources of energy and a geographic shift in energy trade flows is on the cards. The IEA has said it will release a 10-point plan for how European countries can reduce their reliance on Russian gas supplies by next winter.

St Petersburg has more bridges than Venice and one of the marvels of the city is the sight of its main bridges being raised during the night, a feat of hydraulic engineering and a feature of long summer days when the night sky turns different shades of blue. This year, however, the bridges may stay down.





By Kate Dourian, Contributing Editor