Oil market conditions to keep OPEC on sidelines

OPEC+ holds a joint ministerial monitoring committee this week (JMMC), its first official meeting of 2023. The JMMC’s role is to assess member countries’ adherence to OPEC+ production targets and also to advise on oil market conditions and it can request a full meeting of OPEC+ ministers should it recommend a change in production levels. The initial role of the JMMC had been to make sure that OPEC+ countries were not over-producing on their target levels but given so many members of the exporters alliance are failing to hit their target levels, it has taken on more of an advisory role in assessing oil market dynamics.

For the meeting this week we expect that the JMMC will endorse keeping the current OPEC+ targets unchanged. OPEC+ agreed to cut output by 2m b/d in October last year although the actual scale of cuts has been considerably less. Taken from September production levels, OPEC+ cut output by about a net 500k b/d as lower volumes from Saudi Arabia, the UAE, Kuwait, and Iraq were offset by an improvement in Kazakhstan’s and Nigeria’s production along with roughly stable output elsewhere.

Change in OPEC+ output

Source: IEA, Emirates NBD Research

The major policy uncertainty hanging on oil markets in the short term is how the EU embargo on seaborne imports of Russian refined products affects market balances and whether the G7 can agree on a price cap on refined products from Russia, similar to what was imposed on Russia’s crude exports at the end of last year. Like the crude oil price cap, the decision will need to be unanimous among EU officials and will need to be at a level that still makes exports commercially viable for Russia to avoid it withholding output entirely and squeezing energy markets. Price targets under discussion look to be settling at around USD 100-110/b for diesel, compared with current low sulphur gasoil futures (benchmark European diesel futures) trading at around USD 125/b.

With the uncertainty on the price cap looming and needing to be implemented by February 5 when the EU embargo comes into effect, the JMMC seems likely to endorse a policy of holding production targets steady. Since October last year, the substantial change in the outlook for oil markets in 2023 has been the reopening of China and the potential boost that provides to demand. Oil markets have been on an improving trend since the start of the year but we would anticipate that OPEC+ leans towards cautious optimism and would rather see demand improvements materialize fully before agreeing on adding production.