Slowing Chinese demand and Russian supply concerns are at the forefront of Opec+ thinking ahead of the coalition's monthly ministerial meeting tomorrow.
Several Opec+ officials said they expect the group will confirm its scheduled 432,000 b/d increase to its June production ceiling, despite lingering concerns about Chinese oil demand growth arising from strict lockdown measures in Shanghai and neighbouring regions, and in Beijing.
China's zero-Covid strategy to combat resurging infections — and its impact on fuel demand — has always been worrisome, one Opec+ source said. Several other delegates said Chinese developments require close monitoring. China's refineries cut runs by around 1.3mn b/d in April, an Argus survey indicates, and data from analytics firm Kpler show onshore crude stocks have risen by around 760,000 b/d, leaving Chinese buyers the option to draw on inventories after lockdowns lift.
The Chinese restrictions have rattled oil markets, but global prices could rebound to above $110/bl once they ease, one Opec+ delegate said. Front month Ice Brent futures are above $108/bl today, up from $104.97/bl at yesterday's close, bolstered by the EU's proposed ban on Russian oil. This, another delegate said, could overshadow the immediate loss of Chinese demand.
Many European refiners and trading firms have already begun scaling back Russian crude purchases voluntarily or because of uncertainty over the scope of sanctions. European Commission president Ursula von der Leyen said today the EU is proposing a "complete import ban", on crude within six months and on refined products by the end of the year.
"We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minuses the impact on global markets," von der Leyen said.
The growing loss of key outlets is depressing Russian crude production, which was 9.1mn b/d in April by preliminary Argus estimates, down by more than 900,000 b/d from February. Nearly 3mn b/d of Russian production could be shut in from May, the IEA has said, compounding the Opec+ coalition's increasingly unsuccessful attempts to meet its targets. The group's output fell month-on-month for the first time in 13 months in March, and — considering production difficulties in Russia and Kazakhstan — is likely to have done so again in April.
Criss-cross
Still, some Opec+ representatives said they expect international restrictions will only serve to divert Russian crude east — with India digesting the lion's share of this redistribution. India loaded 820,000 b/d of Russian crude last month, more than 20 times what it took before Russia invaded Ukraine. This could, in turn, see Mideast Gulf producers send more output west of the Suez Canal, delegates said.
Opec's Mideast Gulf members have long been drawn to faster-growing Asia-Pacific markets, but have been selling more of their crude to Europe. Some European refiners are taking the rare step of importing UAE crude. And shipments of Iraqi crude to Europe could also rise in the short term, an Iraqi source said.
Consuming nations have spearheaded their own response to the anticipated Russian shortfall. The IEA and the US announced a combined 183mn bl release from emergency stock reserves over six months just two days after Opec+ ministers' last meeting on 31 March, where ministers resisted international calls for larger output hikes.
Opec+ delegates have downplayed the effects of inventory draws. Some said it remains to be seen whether all IEA members honour their pledges, while others said the draws are ultimately "a zero-sum game" aimed at replacing, in advance, Russian crude rather than bringing additional supply to the market.
It is also unclear whether countries that proceed with strategic drawdowns will not be compelled by domestic regulations to restock swiftly, the sources said. A decision by Opec+ to press ahead with a 432,000 b/d rise in June could have the additional benefit of showing support to major buyers, particularly the US, one delegate said.
The Opec+ Joint Technical Committee (JTC), which studies market fundamentals that ultimately inform the group's output policy, will meet later today, ahead of the meeting of the Joint Ministerial Monitoring Committee (JMMC) and Opec+ ministerial conference tomorrow.
