Commodities 2023: Choppy waters for OPEC+ in an oil market clouded by the fog of war

In the words of Saudi energy minister Prince Abdulaziz bin Salman, OPEC and its allies have pulled off a "miracle" in managing a tumultuous oil market through the pandemic and the war in Ukraine.

The coming year may require more prodigious efforts from the producer bloc, as the global oil outlook remains as volatile and uncertain as ever -- and its steadfast partnership with western pariah Moscow continues to complicate its relations with the US and other key customers.

The OPEC+ coalition, which controls almost half of global crude supply, must contend with a US-EU alliance intent on controlling the flow of Russian barrels and strong-arming the oil trade to its geopolitical aims through sanctions and a price cap, as well as SPR releases.

Meanwhile major consumer China is still grappling with COVID-19 outbreaks, even as it has begun to loosen some pandemic restrictions amid widespread citizen protests, while the risk of imminent recession looms over many economies.

At stake is maintaining crude prices at a level that will support the budgets of OPEC+ countries' hydrocarbons-dependent economies, while not worsening inflation and driving oil demand off a cliff. US-Saudi ties, once a bedrock of OPEC policy but now severely strained, also are a factor.

The 23-country OPEC+ coalition spent much of 2022 gradually restoring production to pre-pandemic levels -- though sometimes at a pace too slow for the White House, as crude prices surged to 14-year highs above $130/b in March and June -- before retrenching with new output cuts from November in response to weakening economic indicators.

Platts, part of S&P Global Commodity Insights, assessed Dated Brent at $79.12/b on Dec. 16.

"What primarily concerns us basically is to contain volatility as much as possible because there is no better service for the power and energy industry, in general, than to have a future outlook that is more stable and less volatile," Prince Abdulaziz said Dec. 11 at a forum to discuss the Saudi budget.

Iraq, the third largest OPEC+ member behind Saudi Arabia and Russia, sees $80-$90/b as a fair price for consumers and producers, its national representative to OPEC told S&P Global.

That level "gives an opportunity for investments to take place in field development and [eventual] increases in oil production" to meet future demand, Mohammed Sadoon said. A continued slump in prices, meanwhile, "will impact oil development projects in all producing countries," he said.

Russian flows, Chinese woes

But how the OPEC+ coalition, which includes Russia, will achieve that price band through its control of crude supply is a question its ministers are not yet prepared to answer.

EU sanctions and the G7's price cap are expected to shut in a chunk of Russian oil production, though exactly how much depends on enforcement and consumer buy-in to the punitive measures, as well as Moscow's as-yet undetermined response.

Russian officials have repeatedly said they will not comply with the price cap and threatened to slash production, though no decision has been announced. Further sanctions targeting Russian refined product exports are due to be enforced in February.

OPEC's analysts forecast a loss of 850,000 b/d of Russian liquids supply for 2023 but noted in its most recent monthly oil market report that the estimate was "subject to high uncertainty." As a result, the organization expects a 2023 supply-demand surplus of about 600,000 b/d, Sadoon said, citing internal OPEC analysis.

The International Energy Agency, meanwhile, forecast a 1.4 million b/d plunge in Russian output for 2023.

As for Chinese oil demand, OPEC sees 530,000 b/d of growth for 2023, while the IEA projects a more bullish 820,000 b/d year-on-year rise.

Charting an uncertain course

The high variance in forecasts has stumped the OPEC+ bloc on its next move.

OPEC+ ministers agreed in October to cut production quotas by 2 million b/d from November through the end of 2023, to get ahead of what it said were signs of slowing demand -- prompting an angry response from the US, which accused Saudi Arabia and other Gulf members of siding with Russia in its invasion of Ukraine.

At the Dec. 4 OPEC+ meeting, the group decided to maintain course, with Dated Brent having fallen from a November high of $101.72/b and the impact of the sanctions and price cap on Russia yet to be felt in the physical market.

Ministers are not scheduled to meet again until June 4, but a nine-country monitoring committee co-chaired by Saudi Arabia and Russia will convene in February to review market data and potentially recommend any changes to the quotas.

More resilient Russian flows and persistent weakness in prices could prompt a further reduction.

"Whether momentum is sufficient to garner a cut remains to be seen, but producers are likely united in their displeasure with the current state of oil markets," analysts with S&P Global Commodity Insights said in a recent note.

But a reopening of China's economies from stringent lockdowns and a substantial curtailing of Russian oil exports could provide upward momentum to crude prices and prompt the OPEC+ coalition to consider increasing production at some point.

That could open up some old wounds, with the UAE and Iraq having long chafed at their quotas and seeking a larger share of OPEC+ production, while several other members have struggled to pump anywhere near their targets due to a lack of investment or internal disruptions.

For its part, the OPEC+ coalition said after its December decision that it was ready "to meet at any time and take immediate additional measures to address market developments and support the balance of the oil market and its stability, if necessary."

Ministers will be hoping for more clarity on how to steward the market, in what looks to be a turbulent year ahead.