Opec+ set to stick to existing deal despite demand concerns

Opec+ is set to agree another small increase in production targets for June, delegates from the group say, as expectations that sanctions will crimp Russian output further counter demand growth concerns from Chinese lockdowns.

Opec+ ministers are set to meet on Thursday and are expected to agree to raise production targets by 432,000 barrels per day (bpd) for June, four Opec+ delegates told Reuters.

Under a deal reached in July last year, the group is set to increase output targets by 432,000 bpd every month until the end of September, to unwind its remaining production cuts.

In late March, it agreed to go ahead with the planned output increase for May.

The Opec+ meeting this week comes against the backdrop of a major announcement from the European Union which on Wednesday proposed a phased oil embargo on Russia in its toughest measures yet to punish Moscow for its war in Ukraine.

Opec Secretary General Mohammad Barkindo, in a speech seen by Reuters to a meeting of the OPEC+ Joint Technical Committee which took place on Wednesday, said it was not possible for other producers to replace Russian supply.

“What is clear is that Russia’s oil and other liquids exports of more than 7 million bpd cannot be made up from elsewhere. The spare capacity just does not exist,” he said.

“However, its potential loss, through either sanctions or voluntary actions, is clearly rippling through energy markets.”

Oil prices jumped by more than 4% on the EU announcement, with Brent crude rising to near $110 a barrel.

According to an internal report seen by Reuters, OPEC+ expects supply to exceed demand by 1.9 million bpd in 2022, 600,000 bpd higher than a previous forecast.

The report, prepared ahead of the JTC meeting, also sees OECD oil stocks slightly exceeding the 2015-2019 average in the fourth quarter.

The revision reflects a weaker oil demand growth forecast adopted by the Organization of the Petroleum Exporting Countries (OPEC) in its April oil monthly report.

OPEC now expects 2022 world oil demand to expand by 3.67 million bpd in 2022, down 480,000 bpd from its previous forecast, and Barkindo said the Chinese lockdowns were curbing use of transport fuels and petrochemical feedstock.

“This has affected oil demand, with some suggesting that the country is facing the biggest oil demand shock since early 2020,” he told the JTC. Two OPEC+ sources said the JTC concluded its meeting and left the demand growth forecast unchanged.

OPEC+ expects oil production from non-OPEC countries in the alliance to average 18.2 million bpd, the data showed, a 600,000 bpd downward revision from the previous forecast, partly reflecting lower Russian supplies. Russia’s own forecasts showed output may fall by as much as 17% in 2022, an economy ministry document seen by Reuters showed.

According to the document, Russian oil output may decline to between 433.8 million and 475.3 million tonnes - equivalent to between 8.68 million and 9.5 million barrels per day - in 2022, from 524 million tonnes in 2021. Oil prices bounced on Wednesday ahead of an announcement by the US Federal Reserve and further sanctions on Russia by the European Union, offsetting demand worries in top importer China.

Brent crude futures had risen $1.46, or 1.4%, to $106.43 a barrel by 0616 GMT amid thin trading volume, with China and Japan closed for holidays. West Texas Intermediate crude futures rose $1.59 , or 1.6%, to $104.00 a barrel.

The gains came on the back of news from Tuesday that the European Union would slap new sanctions on Russia for waging war on Ukraine.

European Commission President Ursula von der Leyen is expected to spell out the proposed new sanctions on Wednesday, including a ban on imports of Russian oil by the end of 2022, officials said. Investors are also waiting for an announcement from the Fed on Wednesday. It is expected to intensify efforts to bring down high inflation by raising interest rates and reducing its balance sheet.

Oil “prices remain in a holding pattern ahead of EU sanctions and the Fed”, Stephen Innes of SPI Asset Management said in a note.

In the United States, crude and fuel stocks fell last week, according to market sources citing American Petroleum Institute figures. Crude stocks fell by 3.5 million barrels for the week ended April 29, they said. This was more than an expected 800,000-barrel drop estimated in a Reuters poll.

US government data on stocks is due on Wednesday.

Oil prices fell more than 2% on Tuesday on demand worries stemming from China’s prolonged COVID-19 lockdowns that have curtailed travel plans during the Labour Day holiday season.

The global manufacturing purchasing managers index contracted in April for the first time since June 2020, with China’s lockdowns a key contributor, Caroline Bain, chief commodities economist at Capital Economics said in a note.

“The big picture is clearly negative for commodities demand,” she said, adding that rising inflation and higher interest rates were starting to bear down on spending.

Agencies