Markets Wait to See if OPEC+ Raises Production Quotas at Wednesday’s Meeting

The markets are waiting to see if OPEC+ at its regular meeting on Wednesday will decide to increase production.  Sep WTI crude oil futures (CLU22) prices are sharply lower today by -5.6% on weak Chinese PMI reports and the outside possibility of an OPEC production quota increase on Wednesday.

The OPEC+ cartel, in recent months, has been steadily raising its production quota so that the quota is now back to the level seen in mid-2020 before the cartel slashed production to match weaker demand caused by the pandemic.

However, the actual production level by OPEC+ is some 2.7 million barrels/day (bpd) below its production quota because of various production limits.  Russia accounts for about half of the under-production because its oil has been shunned by sanctions for Russia’s war on Ukraine.  Most other OPEC+ members simply do not have the capacity to ramp up production further.

Saudi Arabia and UAE are the only OPEC+ countries that have any substantial amount of excess capacity they could use to boost production.  Saudi Arabia is under heavy political pressure to boost production, particularly after President Biden recently expended a significant amount of political capital to visit the nation last month.

Mr. Biden presumably would not have visited Saudi Arabia unless the administration thought there was a good chance of convincing the Saudis to raise production.  Saudi Arabia on Wednesday might therefore prevail upon other OPEC+ members for a production quota hike, or at least some nod toward boosting actual production to come closer to the higher quota levels.

However, all the OPEC+ members would need to agree to any further increase in OPEC+ production quotas.  The consensus is that Russia is unlikely to agree to a production increase since Russia needs high oil prices to pay for its war on Ukraine.  Russia also does not want to make any concessions to the U.S. and Europe since it is paying a heavy price for the international sanctions on its economy.

The result is that tight global supplies of oil are likely to continue to underpin oil prices in the coming months.  The main wildcard is the extent to which interest rate hikes by the Fed and other global central banks will weaken global demand for oil and put downward pressure on oil prices.

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