OPEC+ remains to be seen over fears in China

published on Thursday 05 May 2022 at 6:35 PM

Another whirlwind and unsurprising meeting for the OPEC+ oil-producing countries, which on Thursday agreed to a further marginal increase in their black gold production, comforted by risks weighing on demand amid anti-corruption restrictions.

Representatives of the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC) and their ten partners (OPEC+) have decided to “upgrade the total monthly production of 432,000 barrels per day for the month of June,” the alliance said in a statement. a statement. press release.

As in previous months, the cartel is sticking to its strategy of ramping up production very gradually, “given the fundamentals and prospects pointing to a balanced market”.

After drastic budget cuts in the spring of 2020 in light of the shock of the pandemic, the 23 members started to reopen the floodgates in the spring of 2021.

Too slow, however, for the taste of westerners led by the United States, as prices have risen since the invasion of Ukraine.

They flared up again this week following the announcement of a proposed European embargo on Russian oil, with the two black gold benchmarks briefly trading above $110 a barrel on Thursday, up 10-15% from February 24.

According to Edward Gardner, of Capital Economics, “this suggests that the supply-side market is more constrained than OPEC+ suggests”.

– China, a new argument –

The alliance has so far resisted calls from all sides to pick up the pace, a warning now reinforced by the situation in China.

The country has been largely spared for two years and has faced its worst epidemic outbreak in recent weeks, undermining its zero-covid strategy.

Beijing closed dozens of metro stations on Wednesday and residents now fear confinement, such as in Shanghai, China’s largest city of 25 million, where most cases are registered.

“The slowdown in activity in China is certainly a factor justifying an OPEC+ status quo, despite international pressure to increase supply in the face of the current energy crisis,” emphasizes Ipek Ozkardeskaya, analyst at Swissquote bank, interviewed by AFP.

Fears of a global economic slowdown as a result of the war in Ukraine are also weighing on the market.

The International Monetary Fund (IMF) lowered its global growth forecast for 2022 in late April due to the “seismic waves” caused by the conflict, particularly galloping inflation that is undermining consumer purchasing power.

In this feverish climate, OPEC+ recently revised its own estimates downwards.

– Geopolitics and quotas –

In addition to the faltering demand, there is also a geopolitical element to explain OPEC+’s wait-and-see attitude, argues Ms Ozkardeskaya, referring to “a power struggle over oil supplies”.

Despite the war, “the group remains allied to Russia and is working against the will of the United States to increase crude oil production,” the analyst said. “OPEC+ countries are simply unwilling to replace Russian oil.”

For Stephen Innes, an analyst at Spi Asset Management, this policy is becoming “increasingly unsustainable” and “contrary to the mission” to regulate the market from this alliance forged in 2016.

However, it would still be necessary for the alliance to be able to respect the quotas it exhibits.

However, due to lack of investment in oil infrastructure in some Member States or operational difficulties, the cartel regularly falls short of its production targets.