Challenges of oil supply

The Organization of the Petroleum Exporting Countries and Partners (OPEC+) agreed to increase crude oil production higher than expected, in the context of rising “black gold” prices and the European Union (EU)’s recent announcement of a ban on Russian oil imports. The OPEC+ decision is expected to help cool down energy prices, as it can partially offset the supply gap from Russia due to the EU ban.

Logo of OPEC at its headquarters in Vienna, Austria, in June 2018 (Photo: Reuters).
Logo of OPEC at its headquarters in Vienna, Austria, in June 2018 (Photo: Reuters).

The OPEC+ virtual meeting emphasised the importance of balanced and stable markets. As such, the organisation decided to increase production by 648,000 bpd in July and August. This is much higher than the previous monthly gain of 432,000 bpd. This was not an easy decision because OPEC+ is in a position to balance the pressure of increasing production with its relationship with Russia, an important member of the group. With this agreement, OPEC+ wants to reduce pressure on the world oil market without increasing output to the point of damaging Russian interests.

The White House has issued a statement welcoming OPEC+’s latest decision to increase production because the deal helps ease tensions in oil supplies that have pushed up fuel prices in the US. Oil prices recently rose to their highest level in the past two months, after the EU reached a consensus on applying an embargo on most oil imported from Russia.

Accordingly, the EU leaders agreed in principle to cut 90% of the oil imports from Russia by the end of this year, and at the same time resolve the deadlock in negotiations with Hungary on the alleged strict sanctions package of the EU on Moscow. The EU member states have agreed to decline from buying Russian oil transported by sea, which accounted for more than two-thirds of the bloc's total imports.

13 OPEC members and 10 partners have sharply reduced crude oil production in 2020 amid slowing demand due to the COVID-19 pandemic and global blockade orders.

At the urging of the world's top crude consumers, OPEC+ countries slightly increased their output to 400,000 bpd per month since last year. However, due to supply tension, oil prices are heading to a record high in March. Furthermore, the reopening process of the Chinese economy is also a factor supporting oil prices. In March, oil prices soared to their highest level since 2008 and have risen by more than 55% year-to-date.

OPEC+’s decision to increase oil production sharply this time is to compensate for the gap in oil supply from Russia due to EU sanctions. Washington recognised the important role played by Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Iraq in pushing for consensus with this latest oil production increase. However, the above move is considered not to be enough to stabilise oil prices. The EU's cutting most of its oil imports from Russia could cause considerable turmoil in the world market, and at the same time cause a lot of damage to both sides.

The “black gold” market has suffered a great shock because the EU has to increase the purchase of oil from other countries to compensate for the shortage of supplies from Russia. According to the International Energy Agency (IEA), in 2022, the EU and the UK are forecast to consume 13.5 million barrels of oil per day, equivalent to 13.6% of the world's demand. OPEC+ production increases are welcomed by energy consuming countries, including the US and European countries, but the members of this organisation are concerned that the sharp fall in oil prices will cause them to fall into sudden budget deficit, as happened a few years ago.

In addition to the impact of the EU agreement to ban Russian oil imports, the world oil market remains very unpredictable due to the impact of many variables. Oil consuming countries are still struggling with the problem of securing supply, while the unclear prospects of the negotiating process towards the restoration of the Iran nuclear agreement and the complicated development of the COVID-19 pandemic, with the risk of the emergence of a new variant of the SARS-CoV-2 virus, are among the factors affecting the stability of the “black gold” market.