Volatility in Oil Prices Increases Due to Ukraine Crisis... What Is Saudi Arabia's Choice?

OPEC+ Meeting on July 2 Expected to Maintain Existing Policy of Increasing Production by 400,000 Barrels per Day
Oil Price Volatility Increases but Stays Around $90... Iran Nuclear Deal Possibility Also a Variable

[Photo by Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] With the volatility of international oil prices increasing due to Russia's invasion of Ukraine, attention is growing toward the Organization of the Petroleum Exporting Countries Plus (OPEC+) meeting scheduled for the 2nd of next month (local time). The focus is on whether Saudi Arabia will decide to increase production to stabilize the oil market. The United States has been urging Saudi Arabia, the dominant member of OPEC, to boost production for several months.

However, recent analyses suggest that Saudi Arabia is unlikely to increase oil production, given its strained relations with the U.S. and strengthened ties with Russia. Additionally, the West is reluctant to impose direct sanctions on Russian oil exports, and the possibility of a resolution to the Iran nuclear negotiations could suppress oil price increases.

◆ No Additional OPEC+ Production Increase? = The market expects Saudi Arabia to maintain its current production plan without siding with either the U.S. or Russia.

Crown Prince Mohammed bin Salman, who effectively governs Saudi Arabia, has strengthened ties with Russia. In August last year, Saudi Arabia and Russia signed a military cooperation agreement. Saudi Arabia is one of the major arms importers, accounting for 24% of U.S. arms exports from 2016 to 2020. Russia is the world's second-largest arms exporter after the U.S.

On the other hand, relations between the U.S. and Saudi Arabia have remained strained since the assassination of Saudi journalist Jamal Khashoggi, who was born in Saudi Arabia and had sought asylum in the U.S. while criticizing the Saudi royal family. Khashoggi was killed in Turkey in October 2018. The U.S. holds Crown Prince Mohammed bin Salman responsible for Khashoggi's death, and President Biden has not met with the Crown Prince.

Amena Bak, OPEC correspondent for Energy Intel, said, "Saudi Arabia does not want to be in a position where it has to choose between two allies." She predicted, "OPEC's oil policy is determined by market fundamentals, and in this regard, OPEC+ will not increase supply further."

Russian President Vladimir Putin [Photo by Reuters Yonhap News]

◆ OPEC's Assessment: Oil Supply Surplus = At its monthly meeting on the 2nd, OPEC+ maintained its existing policy of increasing production by 400,000 barrels per day despite rising tensions surrounding Ukraine. In March 2020, at the onset of the COVID-19 pandemic, OPEC+ decided to cut production drastically by 5.8 million barrels per day in response to decreased oil demand. Subsequently, at the July meeting last year, it set a policy to gradually restore production to pre-pandemic levels by increasing output by 400,000 barrels per day each month.

In a report released ahead of the monthly meeting on the 2nd, OPEC+ diagnosed the oil market as being in a supply surplus. The report maintained the policy of increasing production by 400,000 barrels per day and projected that if oil consumption rises as expected, there would be an oversupply of 1.4 million barrels per day in the first quarter and 1.7 million barrels per day in the second quarter of this year.

Although OPEC+ has set a gradual production increase policy, some analyses suggest actual production falls short of targets. This is attributed to reduced investments during the COVID-19 pandemic, causing countries like Nigeria, Angola, and Malaysia to fail to produce their allocated quotas. Conversely, Saudi Arabia and the United Arab Emirates (UAE) are believed to have additional production capacity. Saudi Arabia currently produces about 10 million barrels per day and is estimated to be able to increase production up to 12 million barrels per day.

David Goldwyn, former U.S. State Department Special Envoy for Energy under the Obama administration, said, "Saudi Arabia, UAE, and Kuwait have nearly 5 million barrels per day of spare capacity and now is the time to bring that volume to the market." Ben Cahill, Senior Fellow at the Center for Strategic and International Studies (CSIS), also stated, "Saudi Arabia and the UAE have the most additional production capacity, can increase production within a month, and sustain it for at least 90 days."

However, Saudi Arabia, the UAE, and others have refrained from producing beyond their quotas. Given that OPEC itself assesses the market as oversupplied and considering that increasing production to gain additional profits could spark conflicts among OPEC member countries, they appear cautious. Cahill said, "Saudi Arabia and the UAE are reluctant to produce beyond their quotas to maintain cohesion within OPEC+. They want OPEC+ to stay united."

◆ Oil Prices Stagnate... Sharp Rise Followed by Sharp Fall = Contrary to expectations that oil prices would surge past $100 following Russia's invasion of Ukraine, prices have shown increased volatility but no sharp rise.

On the 24th, the day Russia invaded Ukraine, the April delivery Brent crude futures on the London ICE Futures Exchange surged intraday by $8.95 (9.24%) to $105.79 but closed at $99.08 per barrel, up $2.24 (2.31%) from the previous trading day. On the same day, the April delivery West Texas Intermediate (WTI) futures on the New York Mercantile Exchange (NYMEX) surpassed $100 per barrel for the first time since 2014, reaching $100.54, but closed at $92.81 per barrel, up $0.71 (0.77%).

European natural gas prices also surged intraday but gave back much of the gains. The Dutch TTF natural gas futures, the benchmark for European gas prices, rose 33.3% to €118.5 compared to the previous day but retreated significantly from an intraday high of nearly 70% at €144.

Consequently, the New York stock market closed with a sharp rebound after a steep drop at the open. The Nasdaq index fell 3.45% at the start but closed up 3.35%, forming a large bullish candlestick.

This was because the sanctions announced by the U.S. and European countries following Russia's invasion of Ukraine did not directly target Russia's energy sector. Russia's state-owned gas company Gazprom also stated that gas exports to Europe via Ukraine would continue.

West Texas Intermediate (WTI) Crude Oil Futures Price Trend from 23rd to 25th

On the 25th, the New York stock market continued its upward trend while oil prices declined. WTI fell $1.22 (-1.3%) to close at $91.59, and Brent crude dropped $1.15 (-1.2%) to $97.93. The Nasdaq index rose an additional 1.64%.

On the same day, Amos Hochstein, Senior Advisor for Energy Security at the U.S. State Department, said in an interview with Bloomberg TV, "Sanctions will not be imposed on Russian oil because it would hurt American consumers, not Vladimir Putin." He added, "If sanctions target Russian oil and natural gas, prices will rise. Even if Putin halves oil and gas sales, prices would double, ultimately causing pain to the U.S. and its allies."

◆ Iran Nuclear Deal Could Lower Oil Prices by $10 = The prospect of a resolution to the Iran nuclear negotiations is also a factor that could suppress oil price increases.

Cahill said, "The Iran nuclear deal could be reached within one to two weeks," and predicted, "An agreement on the Iran nuclear deal could lower oil prices." He noted that if sanctions on Iran are lifted, a significant amount of urgently needed supply could enter the market.

Cahill added, "No one knows how quickly Iran can increase production and export oil, but it could raise output by 500,000 to 1 million barrels per day within six months."

Recently, it has been reported that Iran has been loading oil onto tankers in preparation for rapid exports if the negotiations are concluded.

Goldwyn predicted, "If Iran returns to the market, oil prices could drop by about $10 per barrel." However, he also anticipated, "Due to the current Ukraine situation, the U.S. is unlikely to make significant concessions in the Iran nuclear negotiations."

This content was produced with the assistance of AI translation services.