PRIMER: JMMC and OPEC+ will meet on May 5th at 12:00BST/07:00EDT and 12:30BST/07:30EDT respectively; OPEC+ is expected to maintain its current oil policy in a smooth meeting [REFILE]

Analysis details (07:40)

OVERVIEW: The JMMC and OPEC+ will meet on May 5th at 12:00BST/07:00EDT and 12:30BST/07:30EDT respectively.  The group is expected to maintain its policy of upping total group output by around 432k BPD in June – which, under the terms of the pact, has been marginally increased from 400k BPD as of May. The meeting comes against the backdrop of several factors, including supply woes from the Russia-Ukraine conflict (and subsequent sanctions), dented demand from China’s COVID situation, and underproduction from some OPEC+ nations. A delegate cited by S&P Global recently suggested "We are not currently seeing strong demand and supply tensions that would lead OPEC+ to change its supply policy… we do not have clear visibility on the impact of the confinements in China on oil demand and Russian production.” From a more diplomatic perspective, the elephant in the room will be Russia, but it is in the group’s best interest to maintain a sound relationship with Moscow. Another smooth and drama-free meeting (at least at face value) is expected.

RUSSIA-UKRAINE: OPEC+ sources cited by Energy Intel believe geopolitics is the main factor behind the higher prices as opposed to a physical market imbalance. Meanwhile, a delegate via S&P Global said there are “no concerns about prices”.  The main issue here is the depleting demand for Russian crude. The EU on Wednesday unveiled its sixth Russian sanctions package, which will involve a complete import ban on all Russian oil; seaborne, pipeline, crude and refined fuels, with a halt of crude purchases within six months and a halt to refined fuel purchases by year-end. Further, sources suggested Hungary and Slovakia will receive an extended phase-out period which will likely last until end-2023 under existing contracts, according to sources via Reuters and chiming with reports via Bloomberg and CNBC. EU members are still debating some details according to Bloomberg sources. Further, Bulgaria's Deputy PM said they would seek an exemption if the EU agreed to allow exemptions on any embargoes Russian oil - which could further complicate the finalisation of the sanctions package. The findings from the JTC suggested OPEC+ sees production from “non-OPEC participants in OPEC+” at a level 600k BPD lower than the last forecast. The IEA, in its latest Oil Market Report (OMR), suggested “Russian oil supply and exports continue to fall. So far in April, roughly 700k BPD of production has reportedly been shut-in. We assume these losses will grow to an average of 1.5mln BPD for the month as Russian refiners extend run cuts, more buyers shun barrels and Russian storage fills up. From May onwards, close to 3mln BPD of Russian production could be offline due to international sanctions and as the impact of a widening customer-driven embargo comes into full force.” The desk also highlights increased Asian purchases of discounted Russian oil as traditional customers are cutting back, but there are no signs right now that China has meaningfully upped its Russian energy purchases, in part likely due to its COVID situation.  

CHINA’S COVID/GLOBAL GROWTH SLOWDOWN: China’s “Zero-COVID” policy remains a headwind for the demand side of the equation. OPEC’s Monthly Oil Market report and the IEA both downgraded their global demand growth forecasts amid an expected slowdown in the global economy. “Severe new lockdown measures amid surging Covid cases in China have led to a downward revision in our expectations for global oil demand in 2Q22”. A delegate cited by S&P Global said: “any blow to Chinese oil consumption may not become apparent until the second half of 2022.”. Nonetheless, the situation could provide members with a scapegoat for not opening the taps further. Beijing city on Wednesday extended its prior lockdown indefinitely, although Shanghai reportedly sees an improving situation.

UNDER-PRODUCTION: In March (the last month for which full production data is available) the group fell 1.45mln BPD short of its quotas, according to S&P Global citing an internal document. This issue is that even if OPEC+ wanted to up output, there is not enough spare capacity to accommodate for the currently elevated prices and any future shortages in the market. RBC highlights “significant concern that if Saudi Arabia and the collective group exhaust their remaining 2-2.4mln BPD spare capacity at this stage, market participants would pivot their focus on the absence of available barrels and prices would move higher.” Meanwhile, according to secondary data via the OPEC OMR, production among the OPEC-13 declined in Libya, Nigeria and Congo. Markets will however likely not see much direct commentary on this front at the May meeting.

IRAN SANCTIONS: Iran remains a wildcard with a deal still to be inked. Talks have stalled and the prospect of a swift return of legal Iranian barrels has dwindled. RBC suggests Saudi could end up upping output if Iranian nuclear talks hit a definitive wall, albeit “it would take another 6-8 weeks before such a prognosis can be made with high conviction.” Thus, this issue will likely not impact the May confab.

NOPEC BILL: Recent reports suggested the US Senate panel will consider the NOPEC bill which gives the option to sue oil-producing countries under anti-trust laws, concerning higher oil and gas prices. This bill has been opposed by the American Petroleum Institute (API) as it could create unintended negative consequences for the US oil and nat gas industry, according to a letter seen by Reuters. This factor will likely not impact the May confab either.

05 May 2022 - 10:25- EnergyGeopolitical- Source: Newsquawk