Russia’s invasion of Ukraine has turned global energy markets upside down, and unless stability returns soon, there could be severe geopolitical consequences for OPEC members. Pre-invasion hydrocarbon markets were close to balance as stable global economic growth combined with rational management strategies of the OPEC+ alliance to balance markets. Despite a global pandemic that crippled the global economy for two years, energy markets had managed to return to relatively stable levels. Some even predicted a post-Covid order in which OPEC+ would experience an era of strong influence and power. Today, the OPEC+ alliance seems to be hanging by a thread as Russia faces an economic crisis over sanctions imposed in response to its invasion. The ongoing shift within OECD countries, particularly the EU, UK and US, to wean from Russian energy supplies is dramatic and could prove influential in isolating Russia from the broader energy market.
At a time when global oil and gas markets were already facing supply problems, Russia’s invasion of Ukraine really added fuel to the fire. The energy-dependent countries of the West are now urging others to increase oil and gas production and exports, not only to satisfy the global hunger for energy, but also to stem the rapid rise in prices. All eyes are on OPEC as the group of oil exporters, some call it an oil cartel, is seen as the only viable option to supply more in the near term. So far, calls from Washington, London and Brussels seem to have fallen on deaf ears. In a seemingly desperate attempt to sway OPEC leadership, British Prime Minister Boris Johnson flew to Saudi Arabia to formally discuss possible investment deals, but mainly to push for additional oil supplies from the kingdom. In meetings with Saudi Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler, and his counterpart, Abu Dhabi Crown Prince Sheikh Mohammed bin Zayed, Johnson pushed for additional oil supplies while also discussing Western sanctions against Russia. However, the prime ministers’ efforts were met with silence, with no new energy pledges made by either side.
According to Johnson, when asked about a possible change in OPEC’s production strategies, MBS and MBZ made it clear that they understand the need for stability in global oil and gas markets. Indeed, the actual response of the two OPEC leaders was very clear that they will not change their production and export strategies at this moment and will not jeopardize their strong ties with Russia’s leader Putin. These answers weren’t particularly surprising to analysts.
OPEC has always prided itself on maintaining healthy reserve production capacity to influence oil markets. For decades, OPEC producers have been the focus of attention from traders, importers and financial analysts and have always been considered the ultimate source of energy in the event of a global crisis. Saudi Arabia and more recently Abu Dhabi are seen as the ultimate swing producers that clients can count on when suddenly a geopolitical or technical issue blocks potential suppliers. The kingdom is still considered the ultimate swing producer with a spare capacity of 1.2 to 2.1 million bpd. In recent years, upstream expansion has put Abu Dhabi in the position of swing producer at 0.6 to 1.2 million bpd. Riyadh’s geopolitical position of power is directly related to this theoretical productive capacity, as it mitigates Iran’s or Venezuela’s distance from oil markets. The additional volumes from Abu Dhabi are becoming increasingly important in such a tight oil market. Before the pandemic, U.S. shale companies were also considered swing producers, although their long-term production capacity varied.
Since the end of the pandemic (which was the first time global analysts seemed to understand that the market was headed for a supply crisis), the market has had to reevaluate this spare capacity narrative. The lack of new oil and gas investments and discoveries over the past few decades has left oil markets drastically unprepared for such a shortage. Some have warned that part of the current OPEC+ export strategy is based on internal capacity constraints. In a market slowly recovering from the destruction of high demand, OPEC members have been able to hide their domestic production restrictions behind the facade of conservative production policies. With Russia in crisis and oil shortages looming, Saudi Arabia, the UAE and other members must put their money where their mouths are. If they don’t act now, rumors about a lack of production capacity will become more and more credible. Current analyzes already show that most OPEC producers are unable to increase production. Saudi Arabia and UAE are believed to have higher capacity, but the current silence from both players will not instill confidence in observers.
A possible reality looms on the horizon where more than 4 million Russian oil barrels are stuck on Russian soil and the market cannot find a replacement. If Saudi Arabia and the UAE are unable to ship the much-needed 2-3 million bpd to western markets, oil prices will soar to unprecedented levels. A possible failure to find a swing producer would not only lead to a real energy price crisis, but would also erode OPEC’s current strategic power. Geopolitically, the attractiveness of OPEC producers to others (financial markets, manufacturers and investors, but also defence/security) is linked to their oil and gas supply capacities. Without this, the entire geopolitical equation will change.
Production capacity of OPEC
Saudi Arabia, Iraq, UAE and Kuwait have 4 million bpd of spare capacity – in 3-6 months
By Cyril Widershoven for Oilprice.com
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