A committee meeting for the Organization of the Petroleum Exporting Countries and their allies next week isn’t expected to result in any changes to oil production levels, but attendees will have a lot to discuss as the reopening of China’s economy and the European Union’s ban on Russian oil products raise uncertainties in the market.
The OPEC+ Joint Ministerial Monitoring Committee (JMMC) will meet on Feb. 1 to review the oil market. It meets every two months, while the next official meeting of the policy-setting OPEC+ members is scheduled for June.
Market “hype” about the upcoming JMMC meeting is “unworthy, since the group has no decision making authority,” said Manish Raj, managing director at Velandera Energy Partners. The committee has the ability to call a full OPEC+ meeting, but “next week’s JMMC is just a foregone conclusion.”
Prices for oil began this year on a sour note, with prices sharply lower in the first two trading days of the year, then rallying as news China’s decision to lift COVID-19 restrictions looked to boost energy demand.
On Thursday, U.S. benchmark West Texas Intermediate crude
for March delivery settled at $81.01 a barrel on the New York Mercantile Exchange, up 0.9% month to date. Global benchmark March Brent crude
settled at $87.47 on ICE Futures Europe, up 1.8% for the month so far.
“All indications suggest that [the JMMC] will stay the course on the 2 [million barrel per day] production cut as they await to assess the durability of the China reopening, as well as the impact of the next round of European energy sanctions on Russian exports,” strategists at RBC Capital Markets, led by Helima Croft, wrote in a Thursday research note.
At a meeting in December, OPEC+ decided to continue with a 2 million-barrel production cut that began in November through to the end of 2023. That meeting came a day ahead of the implementation of the EU’s ban on importing Russian seaborne crude and a price cap of $60 a barrel on Russian oil.
The Russian oil ban has “yet to make a dent in volume, as the Asian buyers keep guzzling all available Russia oil,” said Velandera’s Raj. Refined oil products, especially diesel, are “another story altogether since neither China nor India import diesel or gasoline, he said, noting that they are both exporters. “So whom will Russia sell it diesel to?”
The EU will ban imports of Russian oil products on Feb. 5.
Read: The EU’s latest embargo on Russia will keep diesel prices high
Strategists at RBC Capital Markets said they expect OPEC to “remain aligned on charting a cautious course” in the first half of this year because of “lingering uncertainty about the policy environment after Russian oil exports remained surprisingly robust in 2022 despite sweeping international sanctions and the early days of China easing COVID restrictions.”
‘Biggest oil demand event of the year’
The RBC analysts pointed out that global benchmark Brent oil prices have topped $85 a barrel largely due to confidence about China’s reopening. They also said, however, that on their recent trip to the Middle East, they heard some lingering concerns that Beijing could “reimpose mobility restrictions if there is a major rise in COVID cases and mortality rates due to the weakness in the Chinese healthcare system and absence of effective vaccines.”
“There does not seem to be a significant groundswell of support amongst the producers for adding barrels back at this time until there are clear indications that the reopening is built to last,” the strategists said.
In recent comments, Jim Burkhard, vice president and head of research for oil markets, energy & mobility at S&P Global Commodity Insights, said he believes that China’s economic reopening will be the “biggest oil demand event of the year.”
“’Known unknowns’ will occur, but it is impossible to predict with certainty which ones, when, and of what magnitude, said Burkhard.
He highlighted the potential for an escalation of war beyond Ukraine and more intense sanctions, the possibility that mainland China’s reopening goes awry, higher or lower interest rates and inflation, a U.S. debt default, and extreme weather among other factors.
“Oil reflects the world. We will experience surprises and shocks,” says Burkhard.
Oil supply is likely to see a surplus in the first half of this year, then slip into a deficit in the second half, he said, but a strong oil demand rebound in mainland China could “limit or even offset the bearish price impact of a first half oil supply surplus.”
S&P Global Commodity Insights’ base case 2023 oil price outlook calls for an average of $87 for dated Brent and $83 for WTI.
If demand growth turns out to be weaker than expected and OPEC+ is unwilling to act to support prices of $80 a barrel or higher, said Burkhard, then dated Brent oil — oil to be delivered in the short term — could end up averaging $72 a barrel this year.