One of the relevant features of the current week was the virtual OPEC+ meeting that was expected to lay out the path the producer group would follow after the current supply agreement expires at the end of the month. There was a broad consensus amongst analysts and market players that the alliance will go for a modest increase. In the run up to the meeting the new Secretary General of OPEC, Haitham al-Ghais, pointed out that struggling global economy has had an adverse effect on oil demand growth. The energy minister of OPEC+ member, Kazakhstan, on the other hand, suggested that the current price level of $100/bbl is significantly above the preferred $60-$80/bbl band, hinting at a more sizeable rise in output levels.

Anonym sources, a synonym of “co-ordinated leaks”, implied at the start of the discussion that the proposed increment will only be 100,000 bpd, an emblematic addition by anyone’s standard – something for both Russia and western consuming nations. The market reacted to the news with a $2/bbl rally in one hour. The initial reaction to the deal suggested that a bigger hike was anticipated. The euphoria, however, was short-lived. The largely symbolic increase will obviously not provide a significant buffer to any potential supply shock, but the oil balance will not get tighter either. As a result, sellers emerged, and oil prices fell hard. By the close WTI and Brent finished $3.76/bbl lower. A thorough look at the current state of the market reveals that the room within which the group could manoeuvre is rather constrained.

Firstly, the producer group simply might not be able to ramp up production considerably – announcing an unexpectedly large and unattainable increase could have harmed the group’s credibility. When the alliance launched the current supply deal in May 2020 by taking 9.7 mbpd off the market OPEC’s production was 30.5 mbpd and Russia produced over 11 mbpd. OPEC will come nowhere near this level when the deal expires at the end of this month. There is hardly any member state that could fulfil its current quota. OPEC-10 countries with output ceilings achieved a compliance of well over 400% in July, a Reuters survey shows – in other words they produced more than 1 mbpd less than allowed. Smaller producers showed adherence of over 1,000% to the deal. Nigeria pumped nearly 600,000 bpd less than should have, a compliance of 2,330%. Iraq’s conformity level was nearly 300%. Only Kuwait and the UAE managed to reach its designated production ceiling. In the non-OPEC group, Russia is likely to have pumped more than 800,000 bpd below its upper limit in July, which does not come as a surprise. Until sanctions are lifted the country will not be able to challenge its new quota of 11.03 mbpd.

Secondly, oil prices have dropped more than $35/bbl since March. Why, the argument goes, should OPEC+ increase output in a falling market? There are growing fears of demand destruction and if the current trend continues additional barrels would put unwanted downside pressure on prices and at the same time would unnecessarily deplete thinning spare capacity. Thirdly, the core interest of producing nations is the exact opposite of consumers – the higher the prices, within reasonable limits, the better for their economies. Finally, it is worth recalling the latest findings of the Joint Technical Committee of OPEC+. Ahead of yesterday’s discussion the JTC predicted a global surplus of 800,000 bpd this year. Although it is 200,000 bpd less than previously estimated the fact that global oil inventories are expected to build in 2022 does not warrant significant production increase in the immediate future.

The agreement might have come in at the lower end of expectations, especially if compared to the 600,000 bpd rise signed off for July and August, but it does not upset the current oil balance either way. In fact, by the end of the day the meeting seemed a non-event. The group’s inability to significantly up output levels or its reluctance to re-introduce cuts are probably built in the prices. Whether the next $20/bbl move will take prices to $80/bbl or back up to $120/bbl does not depend on the present strategy of OPEC+. It will be the function of demand destruction caused by inflationary pressure and the consequent hikes in interest rates and on Russia’s attitude towards using energy as a weapon in its war against Ukraine and the western world.

Sinking US gasoline demand

After the initial post-meeting rally petered out sellers took over the control helped by two additional developments. There will be another attempt this week to revive the Iranian nuclear pact. Officials from both Iran and the US will travel to Vienna for the next round of negotiations that is due to start tomorrow. Whilst the chance of a mutually acceptable outcome is as slim as a Russian troop withdrawal from Ukraine the news certainly accelerated the price fall.

The final nail in the bulls’ coffin was the weekly EIA report. The surprise 4.5 million bbls build in crude oil inventories is deemed negative even if more than half of it occurred in PADD 5. The reason is surging crude oil imports, which, on a net basis, rose 2.2 mbpd to 3.8 mbpd last week. The 2.4 million bbls drawdown in distillate stocks helped the CME Heating Oil contract go against the general flow and it settled 344 points up yesterday preventing the rest from falling even harder. The unexpected minimal drawdown coupled with dismal demand figures in gasoline, however, more than offset the bullish distillate reading. Stocks in this product grew by 163,000 bbls compared to a projected decline of 1.6 million bbls. More importantly, gasoline supplied, the proxy for demand, dived 700,000 bpd week-on-week to 8.5 mbpd. The 4-week average value of 8.6 mbpd is nearly 900,000 bpd below the comparable period of last year.

There is a military conflict in the heart of Europe and one of the warring parties is Russia, the third biggest oil producer in the world. The aggressor is incapable of producing and exporting as much as it used to due to current sanctions, which will get tighter going forward. Consequently, it is hard to believe that the downside price potential is bottomless, nonetheless, deteriorating demand conditions are currently in focus, much to the annoyance and disappointment of Vladimir Putin.