The Organization of Petroleum Exporting Countries (OPEC) and its allies led by Russia, a group known as OPEC+, said on February 2 the ministers agreed to raise their countries’ collective production by another 400,000 barrels a day in March.
Asked why OPEC has not pledged more oil to cool prices, Chris Weafer, co-founder of Macro-Advisory in Moscow, told New Europe in an interview on February 4 that the oil group does not have the ability to deliver, at least not over the short to medium term. He explained that one of the reasons why the price of Brent is trading above $90 per barrel is because OPEC+ fell short of pledged production in January. “Traders are assuming that it will not be able to add much of that extra 400,000 barrels per day promised for March as it is still struggling to meet the January commitment,” Weafer said.
He noted that the problem is that OPEC+ countries have cut investment since early 2020, when the oil price collapsed, and it will take time for most to rebuild capacity. More likely in 2023.
Brent has reached 7-year highs due to tensions on Eastern Europe with geopolitics risks troubling oil traders.
Asked if oil prices could climb above $100 if Russia invades Ukraine, Weafer said he does not believe that Russia will invade any part of Ukraine other than, possibly, moving either troops or “military-technical support” into the area of Ukraine now occupied by the Russian-backed separatists. “This is a 50% possibility with the other 50% being Russia’s preferred choice of reaching a negotiated settlement with NATO and under the Normandy Format covering the future of east Ukraine. But, even in the event of the former, the sanctions would be less than now threatened under the full invasion scenario and oil, or gas exports would not be cut,” Weafer said.
According to the co-founder of Macro-Advisory the threat of a conflict is only a secondary reason for the oil price rally. “The main reasons for the rally, and why it is well supported rather than a temporary blip, is because global oil demand is climbing steadily (as Covid fears ease), oi inventories are falling and there are concerns that OPEC+ cannot supply much more oil, at least over the next six months,” he said.
The other supporting factor, according to Weafer, is that the US oil sector is not able to respond as quickly as it would have done in the past. “US producers, especially in the shale sector, are under increasing pressure from very active environment groups and ever tightening US Federal regulations. In the past, US oil output, and exports, would have responded quickly to the rapid price rise but now it is shackled, and the response will be a lot slower and more restrained,” he said.
According to Weafer, OPEC+ is now back in the driving seat. “It has played a patient and smart game of controlling output and waiting for both demand to recover and for the climate management pressures to limit the ability of western producers to respond. Whatever happens to oil demand in the next decade is very unclear. But what is clear is that OPEC+ producers are set to make a huge amount of money through the remainder of this decade. All thanks to climate activism in the West,” he argued.
Asked if Iran’s planned future production could affect the oil price, Weafer said it is a possibility but that still seems unlikely to happen this year or even for a couple more years. The window of opportunity for a deal that then removes the US sanctions blocking Iran oil output, is closing fast, he said, noting that US President Joe Biden is in favor of a revised deal with Iran, if Tehran agrees to a new nuclear deal. “The EU and Russia are also in favor. But the US Congress is completely opposed to any new deal or to any easing of sanctions. This is one of the very few topics that unites both parties in Congress,” Weafer said.
“This year’s midterm elections will be a very close call, in terms of who controls Congress afterwards. President Biden cannot afford to be accused of ‘going soft’ on a country that Congress views as an enemy. They will never forgive Tehran for the embassy siege or for funding terrorist groups,” Weafer argued. “So, unless a deal can be done in the next couple of months, then the White House will not be able, or would not dare, agree to a sanctions relief deal in the run up to the November midterm elections…or likely not in the years coming up to the next US presidential election,” he said, adding that traders view the risk of sanctions relief as being currently very low and are not pricing it in.