Strategy Note /

OPEC+ decision suits Saudi, US, Russia but no oil price relief for importers

  • OPEC+ output increases over the next three months pulled into the next two, removing all Covid-era restraint

  • Saudi compromise makes US (Biden claims credit for output increase) and Russia (stays in the cartel) happy

  • Oil price unmoved as effective new supply so small (scarce Saudi-UAE spare capacity, Angola-Nigeria-Russia constraints)

OPEC+ decision suits Saudi, US, Russia but no oil price relief for importers
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
5 June 2022
Published byTellimer Research

OPEC+ increased its output on 2 June but not by an amount that makes a meaningful dent in global supply. The impact of this decision for those hoping for a decline in oil price is likely no more than the OPEC+ output increases and the releases of OECD strategic petroleum reserves so far this year.

While the stakeholders of Saudi Arabia, the US and Russia walk away with something gained, there is no dent in oil prices and, thus, no relief for oil importers.

Should China demand growth snap back, in the event that Covid restrictions subside and policy stimulus come into effect, then oil prices could go a lot higher.

The gain for net exporters – eg Saudi and the GCC, Colombia, Kazakhstan – and the pain for net importers is likely to persist. The cheapest equity market in this group, relative to the historical average, is Colombia.

The opposite is true for relatively poor net importers. Among those that may see a 4 percentage point or greater hit to current account deficits in 2022 should Brent oil price average US$125 per barrel, all other factors equal, are:

  • India, Pakistan, Thailand in Asia;

  • Kenya, Mauritius, Morocco, Tanzania, Tunisia, and Zimbabwe in Africa;

  • Georgia, Hungary, (and Ukraine) in Europe;

  • Jamaica in LatAm-Caribbean; and

  • Jordan and Lebanon in Middle East.

The next OPEC meeting is scheduled for 30 June.

Announced versus actual output increase

The announced increase of c1.2mbpd (million barrels per day) by the end of August, is far greater than the practical amount (perhaps nearer 0.5mbpd) that likely materialises, because of:

  • Saudi and UAE lack of spare capacity that can be rapidly utilised – Saudi was 0.1mbpd short of its quota in May, while the UAE hit its quota;

  • Angola and Nigeria ongoing production constraints, which are running 15-20% below their quota in May – putting to one side, the risk of any new disruption in Iraq or Libya;

  • Russia sanctions (on 90% of EU oil purchases by end 2022, oil shipping insurance, and new technology-intensive oil development, which requires foreign oil companies) – the IEA estimates the ultimate impact on Russian production could be 3mbpd; and

  • Iran and Venezuela's continuing sanctions – the prospects of a new Iran Nuclear Deal appear no brighter today than at the start of the Biden administration and the re-engagement with Venezuela remains at an embryonic stage.

OPEC+ faster output growth barely covers existing shortfalls

Longer-term, talk and, in some cases implementation, eg UK and Hungary, of windfall taxes on the oil and gas sector, and fiscal incentives for renewables is hardly going to encourage investment in new oil exploration and production capacity.

Diplomacy and stable price, not lower price

The May 2022 OPEC+ meeting was a diplomatic success for Saudi Arabia, the US and Russia.

  • Saudi Arabia has demonstrated to the US, or specifically President Biden, that it is sensitive to the political challenge (as mid-term Congressional elections approach in June) of high retail fuel price inflation. In return, it hopes to build goodwill for a diplomatic rapprochement with the Biden administration, which launched its foreign policy with fanfare over human rights and ethics, a reversal of Biden's efforts for a new Iran Nuclear Deal, and a reaffirmation of US commitment to Saudi security. Saudi Arabia has also demonstrated to Russia that it wants to keep it in the OPEC+ framework and maintain oil supply cooperation, in contrast with the 2014-16 market share war (which briefly reignited in March 2020).

  • US President Biden is able to hint that his administration's pressure on Saudi Arabia and OPEC helped to deliver a commitment to faster supply increase, without which there would have been no change to the existing OPEC+ plan – although, of course, there is no public admission of any direct role. In other words, Biden is doing his bit for the US consumer (voter).

  • Russia has retained its role within the OPEC+ framework, despite increasing pressure on how much output it can sell under ever tighter sanctions. Of course, the next major challenge for OPEC+ is what new output agreement is established after August, once all of the Covid-era restraint has been removed. Russia could remain part of the discussion, but with an exemption from output quota, similar to Iran, Libya, and Venezuela, should its output become so impaired relative to its existing quota at that time.

The OPEC+ decision likely does not provide any relief for consumers and net importers, particularly those with low incomes, of oil. Indeed, should China demand growth snap back, in the event that Covid lockdowns subside and policy stimulus come into effect, then oil prices could go a lot higher. Obviously, the opposite is true for net exporters.

US$125 Oil price impact on emerging markets

Valuation in EM oil and gas exporters

The relatively cheaper oil exporter equity markets are Colombia, Oman and Qatar, with Nigeria and Russia off-limits for fresh foreign investment.

Colombia, Oman, Qatar are the cheaper oil & gas exporters