March 8, 2022/United Capital Research
Last week, OPEC and OPEC + members held their joint technical and ministerial meeting. The monthly meetings were held amid strong recovery in global demand, tightening markets and undersupply owing to disrupted Russian oil sales amid the intensifying conflict between Russia and Ukraine, and increased pressure on OPEC+ to soften its output caps. OPEC+ agreed to stick to its existing output adjustment agreement for April 2022 at 0.4mb/d. After the meeting, Oil prices rose by 7.6%, settling near $112.9 p/b for Brent crude on 02-Mar. Prices have since increased by 5.4%, closing Friday at $118.1p/b.
OPEC+ shrugged off calls for increased production and pumping following rising oil demand at the meeting, even as the geopolitical conflict between Russia and Ukraine has seen oil price spike to its highest levels since 2012. In the group’s judgement, the consensus on its outlook and the current oil market fundamentals point to a well-balanced market. It deems that changes in market fundamentals do not cause current price volatility. Moreover, OPEC+ reluctance to pump more oil into the market could be resulting from the increasing prospects of an Iran nuclear deal which saw prices fall -2.2% on 03-Mar. The U.S. is also set to join a 30-country agreement to release 60 million barrels to temper prices.
Going forward, we expect oil prices to remain elevated in the short term, following the ongoing conflict in Russia and Ukraine. Also, the continued sanctions on Iran’s 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 stay 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 813, a +112 change from last year.
