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OPEC+ Boosts Output as Expected, Geopolitics a Key Factor in 2022

OPEC
  • Today’s OPEC+ meeting concludes with a 400,000 barrels per day production increase - broadly in line with prior guidance and expectations. OPEC+ is in the process of incrementally reinstating energy production from the record cuts of approximately 10m barrels per day in April 2020.
  • The decision suggests that OPEC+ sees Covid-19 Omicron surge having a limited effect on demand for oil in the near-term, but noted that from 1Q22 the oil markets would be in oversupply.
  • OPEC+ will also be keeping a close eye of geopolitical factors which could impact energy markets in 2022. In particular, the standoff between Russia and Ukraine has the potential to influence energy markets in Europe. In the event of significant sanctions on Russia, the European energy shortage could intensify as Putin squeezes supply via the Yamal pipeline.
  • OPEC+ will also be monitoring the Iranian nuclear negotiations which restarted this week in Vienna. If a deal can be struck, then sanctions may be lifted to allow Iran to officially return to oil production. EIA assesses that Iran’s production could return to full capacity, at 3.8 million barrels per day (b/d), if the United States lifts oil sector sanctions.
  • Nevertheless, Iran’s production capacity has diminished with the sanctions. Experts estimate it will take a full year to add 500,000 barrels per day to current production. Iran does have large oil reserves (~25m bbls), but it will take some time to access them - limiting its ability to flood the market and create a price shock in the event that sanctions are lifted.
  • The United States has lobbied OPEC+ to increase production to meet the increased demand of 2021. OPEC+ has cited US pressure as an influence for raising production targets but has been resistant to raising production targets further.
  • There is no guarantee that increased production targets will be met. Environmental and Covid-related issues have meant that smaller OPEC states have been unable to meet production targets. Saudi Arabia, the United Arab Emirates, and Iraq have been the only OPEC+ members with the capacity to consistently hike production to the requisite level while Russia failed to lift production in December - suggesting they could be getting closer to capacity.
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