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OPEC + has limited spare capacity, Russia is less relevant

OPEC + has “in a way broken down”, the chief analyst told an oil research firm after the oil price rose despite the alliance announcing that it would increase supply more quickly.

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

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

Both West Texas Intermediate crude futures and international benchmark Brent crude were more than 1[ads1]% higher after the news.

The problem is that countries in the OPEC + alliance have not reached their goals, said Paul Sankey of Sankey Research.

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

Saudi must make a choice – do we let the price go higher while maintaining a super emergency, super crisis level of spare capacity?

Paul Sankey

Principal Analyst, Sankey Research

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

Saudi Arabia, the king of OPEC and the world’s second largest oil producer, has about one million barrels per day with extra production capacity, but does not want to use everything, Sankey said.

“Saudi must make a choice – do we let the price go higher while maintaining a super emergency, super crisis level of spare capacity?” he asked. “Or do we put oil into the market and go to almost zero spare capacity, and what happens if Libya goes down?”

A political deadlock 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 cartel group when Europe and the rest of the world begin to sanction Russia,” he told CNBC.

Like Sankey, Pickering said OPEC did not have much overcapacity beyond countries such as Saudi Arabia and the United Arab Emirates.

“It comes down to just a few countries and what they are willing and able to bring to market. So Russia is going to slip out of this cartel over time,” he said.

China and India have bought more oil from Russia, but that will not be enough, said Rachel Ziemba, founder of Ziemba Insights.

“Ultimately, I do not think the logistics are there to redistribute completely,” she said.

Demand not destroyed

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

“China is coming back from Covid, so it’s picking up. Seasonally, we see strength in demand in general in the summer [and] “You’ve got a pent-up demand for travel related to some kind of Covid situation over the last couple of years,” Pickering said.

However, Sankey said demand does not appear to be responding to higher prices yet.

Friday night in Asia, US oil was down 0.6% to 116.17 dollars per barrel, and Brent was down 0.48% to 117.05 dollars per barrel.

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

“Still, demand is not being ruined, so it’s a very bullish setup, but it’s a little crazy to be honest,” he said.

“Everyone flies more and drives more. Everyone is kind of immune to it. It’s a crazy situation, and our forecast is $ 110 to $ 150 burned through the summer and beyond,” he said.

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

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