OPEC signals it will maintain slow output hikes, but is closely watching Ukraine

OPEC and its partners are planning to stick with their planned modest production increases each month, according to delegates, despite Russia's invasion of Ukraine sending Brent crude oil futures soaring above $100/b in intraday trading Feb. 24.

OPEC+ officials continue to point to geopolitics as underpinning the recent surge in oil prices, though severe sanctions could change the calculus when the coalition meets March 2, if Russian crude exports are cut off.

OPEC and 10 Russia-led allies, under their Declaration of Cooperation, have been gradually restoring crude production in monthly 400,000 b/d increments from the historic cuts made during the depths of the pandemic.

Russia's oil flows have yet to be disrupted, delegates noted, adding that market indicators showed no signs of any oil shortages. The US said it was "exploring" a coordinated emergency oil release with other allies, if needed, while the International Energy Agency said its members stood ready to tap their strategic petroleum reserves to address any potential supply squeeze from the crisis.

"Let's wait and see. OPEC eliminates geopolitical events in its decisions [but] let's hear the ministers' comments in the coming days," one delegate said on condition of anonymity.

Another said he expected the March 2 meeting to affirm the next 400,000 b/d rise "as of now."

OPEC+ harmony

Russia is one of the top three crude producers in the world, with output of 10.08 million b/d in January, according to the latest S&P Global Platts survey of OPEC+ output. Since 2017, it has teamed up with OPEC and other key producing countries on a series of output cuts to prop up the market.

In response to the Ukraine invasion, Western countries have already imposed a raft of sanctions on Russian entities and officials and have threatened more, including measures that could effectively block its energy exports by restricting banking access.

US President Joseph Biden is scheduled to deliver remarks on the crisis at 1730 GMT Feb. 24 after meeting with G7 leaders.

Key OPEC members Saudi Arabia and the UAE, which hold the bulk of the group's spare production capacity, have come under heavy pressure from the US and other major consumers to accelerate their production increases to cool off the market and tamp down rising inflation.

So far, however, ministers have shown no inclination to pump beyond their quotas, preferring to maintain the oft-fragile harmony within the alliance and avoid escalating an intra-OPEC+ market share battle.

"If we did see a reduction in Russian supplies and a response by other members to restore balance to the market, then obviously that would place the Declaration of Cooperation under great strain. We haven't gotten there yet," said Neil Atkinson, an independent analyst who formerly headed the IEA's oil industry and markets division.

Front-month ICE Brent futures were up 6.9% at $103.53/b at 1555 GMT, after earlier surpassing $105/b, while Platts assessed Dated Brent at $100.49/b on Feb. 23.

Market stability

The past few OPEC+ meetings to rubber stamp the 400,000 b/d production increases have wrapped up quickly and the typical press conferences have been canceled.

OPEC+ watchers and insiders expect largely the same at the upcoming meeting, with ministers cautious of appearing to pick a side between Russia and their historical allies in the West.

Besides geopolitics, ministers have blamed recent market volatility on industry-wide underinvestment prompted by Western countries' overeager pivot away from the fossil fuels their economies are still largely reliant on.

Ministers also appear wary of a potential new Iran nuclear deal, which could eventually bring some 1.5 million b/d of Iranian oil back onto the market.

An advisory delegate-level technical committee is scheduled to convene March 1 to review market outlooks ahead of the full OPEC+ meeting.

In pragmatic terms, though they are enjoying higher revenues, OPEC+ members are conscious that a further increase in prices could derail the global economic recovery from the pandemic and potentially damage long-term oil demand.

A further escalation in Ukraine could force a difficult decision.

"It is truly a hard test to this alliance," said Yousef Alshammari, head of oil consultancy CMarkits.