OPEC+ will meet on Sunday to decide its next production step amid increased geopolitical tensions that affect nearly a third?of?its output. This volatility could give the group the cover it needs to maintain its narrative of a balanced market, even though the facts in the field suggest otherwise.

This group, made up of the Organization of Petroleum Exporting Countries (OPEC) and its allies, including Russia, is expected to agree on Sunday that they will?increase output by 137,000 barrels a day (bpd),?after a three-month hiatus prompted by seasonal weak demand. This would be a sign of confidence in the group's prediction that oil demand and supply will be broadly balanced through 2026. The International Energy Agency, however, forecasts a massive oversupply in excess of 3.7 millions barrels per day.

Yet, there are signs that the oil market may be loosening. These include increased global production, increasing inventories onshore and offshore, and softening demand growth. The IEA has lowered its forecast for the growth of global oil demand in 2026 from 900,000 bpd to 850,000 bpd this month, a reduction of around 80,000 bpd compared to its January forecast. Even OPEC analysts have predicted that the demand for OPEC+ oil will drop by 400,000 bpd from the previous quarter, to 42.2 millions bpd. This is due to higher production in other countries. The group believes that demand for their crude will rebound by 1.2m bpd during the third quarter. This is in line with their belief that the market would remain balanced this year.

GEOPOLITICAL STORM

The rising geopolitical risks have masked signs of underlying weakness, but this has not led to a drop in crude oil prices. Brent crude oil prices, the global benchmark, have reached $70 per barrel, their highest level since August. This is due to increasing tensions on many fronts.

Venezuela, for example, is under Washington's control and has been subjected to Washington-imposed sanctions. Around a third of OPEC+ output - 13.5 million bpd – is also now exposed to a U.S. threat. This market is currently facing the biggest risk due to the current standoff between Iran and the U.S. The U.S. and Iranian officials are set to hold a third indirect round of talks on Thursday, in Geneva, in order to try and reach an agreement over Tehran's nuclear ambitions. However the differences between the two parties appear large. The U.S. is building up a massive military presence in the Middle East. This region exports roughly 20 million barrels per day of crude oil, and refineries products. A prolonged military presence here could cause severe disruptions to the oil and gas market.

During the same period, Western sanctions against Russia are causing severe distortions on energy markets. The full-scale Russian invasion of Ukraine, which entered its fifth anniversary this week, is now in its fifth year. They are affecting Russian production which, according to IEA, was 350,000 bpd less than the 9.57 million bpd OPEC+ quota in January.

Indian refiners are also having difficulty placing their crude oil as they have drastically reduced purchases due to the interim trade agreement with the United States.

According to Kpler, data analytics company, the volume held by Russian crude on tankers in recent weeks has been near a record of 155 million barrels. This is a significant contributor to the increase in global inventories.

The large accumulation of sanctions oil from Russia and Iran in recent months has distorted?global balances, and supported oil prices, despite signs that demand growth was slowing.

GOLDILOCKS INCREASE OUTPUT

OPEC+ tends to ignore geopolitical turmoil and focus on fundamentals of supply and demand. This time, the headline noise may be what allows the group to pursue their desired strategy.

The eight OPEC+ key producers - Saudi Arabia, Russia and the United Arab Emirates as well as Kazakhstan, Kuwait and Iraq, Algeria, and Oman - increased their production quotas between April and December 20,25 by approximately 2.9 million bpd, which is equivalent to?roughly 3% global demand. This was done even though the IEA forecasted an increasing supply glut. The group took a break of three months.

OPEC+ Ministers could be forgiven if they chose to wait and see rather than increase production immediately, given the uncertainty that hangs over?the oil markets.

The group has made it clear that they believe higher production levels are warranted.

OPEC+ could decide on a modest increase in output - small enough not to'materially loosen global supplies but large enough to show confidence in the market outlook.

The producer group would be unable to meet its goals if it wasn't for the heightened geopolitical tensions, and the lack of clarity regarding global supply.

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(source: Reuters)