The almost inconsequential increase in oil output announced by the OPEC+ group has highlighted an emerging dynamic in global crude markets, namely that the producer group is no longer in the driving seat.
Since OPEC+ was formed in 2017 the market has hung on its every word and analysed every move with great detail, and oil prices have largely moved in tandem.
But by increasing production by a tiny 100,000 barrels per day for September, the group, which consists of the Organization of the Petroleum Exporting Countries (OPEC) and key allies including Russia, runs the risk of diminishing its relevance.
OPEC+ is facing two problems.
The first is that the market is increasingly focused on the related issues of declining demand amid a global economic slowdown, while still trying to assess the full impact of the loss of Russian crude and product exports, especially to former top buyer Europe.
The second is that the group is struggling to produce as much oil as it says it will, which has the impact of leading market watchers to look more at what OPEC+ actually does, rather than what it says it’s going to do.
The 10 members of the OPEC part of the wider group that have quotas produced 24.98 million bpd in July, up slightly from June’s 24.74 million, according to a Reuters survey.
While the small increase may seem to indicate the OPEC 10 are meeting their commitment to pump more oil, the actual target for them under the OPEC+ agreement was 26.276 million bpd.
This means the 10 OPEC members with quotas were under-producing by 1.7 million bpd.
It doesn’t take much imagination to work out that crude prices would be substantially lower than what they currently are if the OPEC members were actually meeting output targets.
But the market is no longer focusing on shortfalls in production from both the OPEC 10 and the wider OPEC+ group.
PRICE ACTION
This was starkly illustrated by the reaction of global benchmark Brent crude futures to the miniscule OPEC+ boost to September’s planned output.
The front-month contract fell its lowest since Feb. 23, the day before Russia invaded Ukraine, ending Wednesday’s session at $96.78 a barrel, down 3.7% on the prior day’s close.
U.S. West Texas Intermediate futures also dropped to the lowest since February, ending at $90.66 a barrel, down 4% from the previous day, as the market focused on a surprise build in U.S. crude and gasoline inventories.
The increase in U.S. stockpiles is among indicators suggesting that crude demand is softening amid the spike in prices caused by Russia’s attack on Ukraine and the subsequent impact on global economic growth.
It may be more important to the market now to look at factors such as the ongoing, but tapering, release of U.S. strategic inventories, as well as demand figures across the globe.
Asia, the top-importing region, is showing mixed signs when it comes to crude demand, with Refinitiv Oil Research forecasting July imports at 24.57 million bpd.
While this is up from June’s 8-month low of 23.83 million bpd, it’s below May’s 26.73 million bpd and is in line with the average of imports for the first half.
China, the world’s biggest crude buyer, is still a soft spot, with July imports expected at 8.42 million bpd, down from June’s 8.75 million bpd, which was a 49-month low, according to Refinitiv data.
There is some optimism that China’s imports will pick up over the rest of 2022, but this will be dependent on Beijing’s success in stimulating the world’s second-biggest economy as it emerges from a series of COVID-19 lockdowns.
India, the world’s third-biggest crude importer, is also forecast to see slightly weaker arrivals in July, with Refinitiv estimating 4.63 million bpd, down from June’s 4.69 million bpd.
Overall, the market dynamic seems to be tilting toward demand concerns outweighing supply issues.
This doesn’t render OPEC+ irrelevant, but it does lessen the influence the group will have in influencing prices, at least for now.
Clyde Russell is an energy columnist at Reuters. The views and opinions expressed are his own.