OPEC+ is ‘sort of broken down’ as Russia loses relevance and the group faces limited spare capacity

OPEC+ is “kind of broke,” a senior analyst at an oil research firm said after oil prices rose despite the alliance announcing it would increase supply more quickly.

OPEC and its allies decided to pull almost 10 million barrels from the oil market in 2020 when Covid first hit and demand evaporated.

The alliance said Thursday it would increase production by 648,000 barrels per day in July and August to end production cuts earlier than expected.

West Texas Intermediate crude futures and international benchmark Brent crude settled more than 1% after the news.

The problem is that the countries of the OPEC+ alliance have not met their targets, said Paul Sankey of Sankey Research.

“The whole OPEC system is kind of broken right now,” he told CNBC’s “Squawk Box Asia” on Friday. OPEC can generally influence oil prices by controlling its production, but Sankey said the market sees oil supply problems persist despite the announcement.

Saudi Arabia has to make a choice – are we going to let the price go up while maintaining a level of super emergency and super crisis spare capacity?

Paul Sankey

Senior Analyst, Sankey Research

Only two or three OPEC countries have spare capacity, he said.

Saudi Arabia, the kingpin of OPEC and the world’s second-largest oil producer, has about a million barrels a day of extra production capacity but doesn’t want to use it all up, Sankey said.

“Saudi Arabia has to make a choice – are we going to let the price go up while maintaining a level of super emergency and super crisis spare capacity?” He asked. “Or do we add oil to the market and go to near zero spare capacity, and what if Libya collapses?”

A political standoff in Libya has led to a partial blockade of oil facilities, Reuters reported in May.

Limited Russian exports

The new quota also includes Russian production, which has been limited by sanctions due to the war in Ukraine, he said.

Dan Pickering, chief investment officer at Pickering Energy Partners, said Russian oil production would slowly decline “by default”.

“It will become less relevant in this group of cartels as Europe and the rest of the world start sanctioning Russia,” he told CNBC.

Like Sankey, Pickering said OPEC doesn’t have much excess capacity beyond countries like Saudi Arabia and the United Arab Emirates.

“It just depends on a few countries and what they want and can bring to the market. So Russia will come out of this cartel over time,” he said.

China and India have bought more oil from Russia, but it won’t be enough, said Rachel Ziemba, founder of Ziemba Insights.

“At the end of the day, I don’t think the logistics are there to completely redistribute,” she said.

Application not destroyed

Despite supply problems and very high oil prices, demand for energy has not fallen much.

“China is coming back from Covid so it’s accelerating. Seasonally we see demand strength usually in the summer [and] you have pent-up travel demand related to some sort of Covid situation over the last two years,” Pickering said. He said some demand erodes when West Texas Intermediate breaks above $115 a barrel.

Sankey, however, said demand doesn’t seem to be responding to higher prices yet.

On Friday night in Asia, U.S. crude was down 0.6% at $116.17 a barrel and Brent was down 0.48% at $117.05 a barrel.

Gasoline and diesel prices are even higher due to refining capacity constraints, Sankey said.

“Still, demand isn’t destroyed, so it’s a very bullish setup, but it’s a bit crazy to be honest,” he said.

“Everyone is flying more and driving more. Everyone is kind of immune to that. It’s a crazy situation and our forecast is $110-$150 Brent through the summer and beyond,” a- he declared.

– CNBC’s Weizhen Tan and Pippa Stevens contributed to this report.

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