February 8, 2022/United Capital Research
Last week, OPEC and OPEC + members held their joint technical and ministerial meeting. The meetings were held amid increased pressure by refiners and other major economies on OPEC+ to soften its output caps amid rising oil prices and undersupply in the market. However, OPEC+ agreed to stick to its existing output agreement. Consequently, Oil prices rose settling near $90 a barrel for Brent crude.
At the meeting, OPEC+ shrunk off calls for increased production and pumping following rising oil demand, amid geopolitical tensions between Russia and Ukraine has seen oil prices spike to its highest price in the seven years. Major OPEC players like Swing Producer Saudi Arabia believe that additional pumping into the market could potentially lead to oversupply later in the year, considering the potential supply from Iran, if sanctions are eventually lifted. Moreover, OPEC+ reluctance to pump more oil into the market could be supported by output data that shows that OPEC+ and non-OPEC supply has underperformed to meet quotas in recent months, which leaves the market potentially undersupplied in the short run. Also, estimates from the Joint Technical Committee (JTC) of OPEC+ highlighted the expectation for Crude supply to be surplus in 2022, by 1.3mbpd (OPEC).
Going forward, we expect oil prices to remain elevated in the short term, following ongoing tensions in Russia and Ukraine. Also, the continued sanctions on Iran output should keep Iranian oil off the market at least in the near term. Lastly, we suspect that more prominent output players within OPEC+ will be happy with elevated prices, which could support their fiscal balances, considering the expectations of capital flights from emerging and frontier market players in 2022. However, we will be watchful of the space considering the recent struggles for OPEC+ members to meet output quotas. Another potential downside risk to prices is the recent surge in US production. Higher cost wells have less incentive to focus on CAPEX discipline considering the 15th week, rise In total rig count now sits at 613, levels not seen since 2014.
