Key members of the OPEC+ oil cartel announced a greater-than-expected increase to production quotas on Sunday following US and Israeli strikes on Iran that triggered retaliation by Tehran across the Middle East.
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The eight-strong V8 (Voluntary Eight) group in the alliance, which includes top oil producers Saudi Arabia and Russia β as well as several Gulf states bearing the brunt of Tehranβs missile strikes β said they had agreed a βproduction adjustmentβ of 206,000 barrels per day (bpd).
βThis adjustment will be implemented in April,β they said in a statement.
The text did not mention the outbreak of the Iran conflict, instead citing βa steady global economic outlook and current healthy market fundamentalsβ as their reasons for the increase.
Before the weekendβs meeting, experts had forecast a more modest increase of 137,000 bpd.
However, Jorge Leon, an analyst at Rystad Energy, warned that the agreed-upon increase might not be large enough to prevent the Iran conflict from causing a spike in oil prices when trading opens on Monday.
Leon pointed to the possibility that Iran could target the Strait of Hormuz, a key waterway for nearly a quarter of the worldβs seaborne oil supplies, in retaliation.
Iranβs Revolutionary Guards have contacted ships to announce that the Strait was closed.
On Sunday, Iranian state TV said an oil tanker in the strait was struck while attempting to βillegallyβ pass through and was sinking, showing footage of a burning tanker at sea.
βIf oil cannot move through Hormuz, an extra 206,000 barrels per day does very little to ease the market,β Leon said, arguing that βlogistics and transit risk matter more than production targets right nowβ.
The OPEC+ move βis unlikely to calm marketsβ, he said.
βPrices will respond to developments in the Gulf and the status of shipping flows, not to a relatively small increase in output,β Leon added.
βNightmare Scenarioβ
Besides Russia and Saudi Arabia, the V8 group within OPEC+ includes Kuwait, Oman, Iraq, and the United Arab Emirates, all of which were targeted by Iranian attacks for a second day on Sunday.
Algeria and Kazakhstan are also part of the group.
Another analyst, Stephen Innes, managing partner at SPI Asset Management, said that, with the fear of incoming missiles in the Strait of Hormuz, insurers cancelling contracts for vessels wanting to go through there, and jammed electronic signalling in the Gulf region, commercial shippers were scared.
They are βstarting to act as if the route is compromised,β he said.
βA full closure for more than a few days is the nightmare scenario,β he said.
A blockage of the strait could mean oil prices leaping from around $72 before the war to $120 to $150 a barrel when trading starts on Monday, he said, based on industry estimates.
He and other analysts pointed to land pipelines Saudi Arabia and the UAE could use to get around shipping through the strait, but noted that would still leave a shortfall of some eight million to 10 million bpd on the market.
βThose are meaningful pressure valves, but they are not a replacement for the full seaborne flow,β Innes said.
While higher prices might seem a boon for OPEC+ countries, it in fact carries the risk of increasing competition from producers outside the cartel, such as the United States, Canada, and Brazil.
Kpler analyst Homayoun Falakshahi told AFP that the cartel might βprefer prices of $80 to 90, but around $70 per barrel is the ideal price levelβ to cut the incentive for more investment by those rival producers.
He added that Russian production has been on a downward trend since November, leaving analysts to think that it was at its maximum output.
Leon, of Rystad Energy, said the only OPEC+ members βwho can really boost their production are Saudi Arabia, the United Arab Emirates, and, to a lesser degree, Kuwait and Iraqβ.
AFP
