OPEC + has “somehow fallen apart,” a lead analyst at an oil research company said after oil prices rose, although the alliance said it would increase supplies faster.
OPEC and its allies decided to extract nearly 10 million barrels from the oil market in 2020, when Covid first hit and demand evaporated.
The alliance said on Thursday it would increase production by 648,000 barrels a day in July and August to end production cuts earlier than previously agreed.
West Texas Intermediate and Brent international oil futures rose more than 1 percent higher after the news.
The problem is that the OPEC + countries are not achieving their goals, said Paul Sankey of Sankey Research.
“The whole OPEC system is falling apart right now,” he told CNBC’s Squawk Box Asia on Friday. OPEC can usually influence oil prices by controlling oil production, but Sanki said the market sees oil supply problems continuing despite the announcement.
Saudi Arabia has to make a choice – are we letting the price go up while maintaining a super-urgent, super-crisis level of spare capacity?
Paul Sanki
Lead analyst, Sankey Research
Only two or three OPEC countries have spare capacity, he said.
Saudi Arabia, the main role in OPEC and the world’s second-largest oil producer, has about a million barrels a day of additional production capacity, but does not want to use all of it, Sanki said.
“Saudi Arabia has to make a choice – are we letting the price go up while maintaining a super-urgent, over-crisis level of spare capacity?” He asked. “Or will we add oil to the market and move to almost zero free capacity, and then what will happen if Libya falls?”
Libya’s political stalemate has led to a partial blockade of oil facilities, Reuters reported in May.
Limited Russian exports
The new quota also includes Russian production, which is limited by sanctions over the war in Ukraine, he said.
Dan Pickering, chief investment officer at Pickering Energy Partners, said Russian oil production would slowly decline “by default”.
“This will become less relevant in this cartel group as Europe and the rest of the world begin to sanction Russia,” he told CNBC.
Like Sanki, Pickering said OPEC does not have much excess capacity outside countries such as Saudi Arabia and the United Arab Emirates.
“It comes down to just a few countries and what they want and can bring to the market. So Russia will get out of this cartel over time,” he said.
China and India are buying more oil than Russia, but that will not be enough, said Rachel Ziemba, founder of Ziemba Insights.
“After all, I don’t think the logistics are there to redistribute completely,” she said.
Demand is not destroyed
Despite supply concerns and very high oil prices, energy demand has not fallen much.
“China is coming back from Covid, so it’s increasing. Seasonally we see strength in demand in general in the summer [and] you have a delayed demand for travel related to something like the situation with Covid in the last few years, “Pickering said. He said some demand was eroding when the West Texas Intermediate was over $ 115 a barrel.
However, Sankey said demand did not yet seem to respond to higher prices.
On Friday night in Asia, US crude fell 0.6 percent to $ 116.17 a barrel and Brent fell 0.48 percent to $ 117.05 a barrel.
Gasoline and diesel prices are even higher due to constraints on refining capacity, Sanki said.
“However, demand is not being destroyed, so it’s a very bullish setting, but it’s a little crazy, to be honest,” he said.
“Everyone flies more and drives more. Everyone is immune to it. It’s a crazy situation and our forecast is $ 110 to $ 150 Brent in the summer and beyond,” he said.
– Weigen Tan and Pippa Stevens of CNBC contributed to this report.
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