The OPEC+ coalition of oil producers – made up of OPEC members led by Saudi Arabia and non-cartel members led by Russia – is considering whether to increase oil production by 400,000 barrels per day in April.
Since July, the coalition has been adding this amount of oil every month to gradually restore the deep production cuts made at the start of the coronavirus pandemic when fuel demand plummeted. People are driving and flying more as COVID-19 restrictions have eased in some parts of the world, but the amount of oil on the market has not kept up with demand.
Benchmark U.S. and international crude oil rose above $110 a barrel on Wednesday as investors worried about an invasion by Russia, one of the world’s biggest energy suppliers. While the coalition of oil-producing nations may benefit from high prices, policymakers will be on the right track as high energy prices may backfire and push oil-consuming economies – their customers – into recession. .
The fallout from the Russian invasion of Ukraine will have a huge impact on the OPEC+ meeting, which will be held online. Participating countries should keep in mind that the situation could trigger a global recession, just like high oil prices, said Amy Myers Jaffe, research professor and managing director of Tufts University’s Climate Policy Lab. This would cause demand for crude to plummet again.
“It changes the perspective of uncertainty in which OPEC normally makes its decisions,” Jaffe said. “You can’t do that based on your oil and gas supply and demand forecasts. You also need to predict geopolitical risk, you need to think about whether there will be sanctions, so you need to consider a wider range of issues.
Prior to Russia’s invasion of Ukraine, the International Energy Agency called on OPEC+ to increase production beyond the expected increase, due to global oil shortages. The IEA took its own steps to mitigate rising prices on Tuesday when the Paris-based organization, which counts the United States, Germany, France, the United Kingdom, Japan and Canada among its members , agreed to release 60 million barrels of oil from strategic reserves to send the message that oil supplies will not be insufficient due to war.
Adding to supply constraints, some oil buyers in recent days have shunned Russian crude, fearing that if sanctions were applied to Russian oil or gas, their purchased oil could be rendered unusable.
“Cargoes have already been rejected by European refiners in the market, because people are afraid that sanctions are coming, and so they don’t want to be caught with cargoes that they cannot resell,” Jaffe said.
Russia’s actions in Ukraine have made its crude oil “one of the most toxic barrels in the market,” said Louise Dickson, senior oil market analyst at Rystad Energy.
Also, Russia could end up reducing its oil exports because it uses more fuel.
“Making an invasion of the magnitude that the Russians are doing in Ukraine requires a lot of fuel, so their domestic use will increase,” Jaffe said. “So we’re probably going to see fewer Russian oil exports, unless they increase production because their demand is increasing.”
Some OPEC+ countries have spare production capacity and could theoretically increase their own production for a while if Russia supplies less oil to the market or if more buyers reject Russian crude. But these other nations may be reluctant to turn up the heat.
“They’ve always kind of fallen back on the idea that they don’t want to move into somebody else’s space,” said Jacques Rousseau, managing director of Clearview Energy Partners. “If it gets to the point where Russian oil is being pushed back, then the question becomes, where is the replacement oil coming from?”
Saudi Arabia has the most unused capacity, followed by Iran and then the United Arab Emirates, according to Clearview.
Other OPEC+ countries, including Angola and Nigeria, produced below their target levels.