Russia’s invasion of Ukraine has sent oil prices soaring and could soon deprive oil markets of more than four million barrels of Russian oil.
The pre-invasion hydrocarbon markets were almost in equilibrium, as stable global economic growth combined with rational management strategies from the OPEC+ alliance to balance markets. Despite a global pandemic that disrupted the global economy for two years, energy markets had managed to return to a level of relative stability.
Western energy-dependent countries are now calling on others to increase oil and gas production and exports not only to quell the global thirst for energy but also to counter the rapid rise in prices. All eyes are on OPEC, as the oil exporters group, some call it an oil cartel, is considered the only viable option in the short term to supply more. Until now, all calls from Washington, London, and Brussels appear to have fallen on deaf ears. In a seemingly desperate move to influence OPEC’s leaders, British PM Boris Johnson flew to Saudi Arabia, officially to discuss possible investment agreements, but mainly to push for additional oil volumes from the Kingdom.
A possible reality is hovering on the horizon in which 4+ million Russian oil barrels are stuck on Russian soil and the market is unable to find a substitute for them. If Saudi Arabia and the UAE are not able to supply that much-needed 2-3 million bpd to Western markets, oil prices will soar to unseen heights. A potential failure to find a swing-producer would not only lead to a real energy price crisis but would also undermine the current strategic power OPEC holds. Geopolitically, OPEC producers’ attractiveness to others (financial markets, manufacturers, and investors, but also defense/security) is linked to their oil and gas supply capabilities. Without this, the entire geopolitical equation will change.
OPEC Production Capacity
Saudi Arabia, Iraq, the UAE, and Kuwait have 4 million bpd of spare capacity – in 3-6 months