The world’s biggest oil producers are set to hold a crucial meeting on Wednesday to decide how much oil they could put on the market from September.
It comes just weeks after US President Joe Biden traveled to Saudi Arabia to personally persuade the country to pump more kegs and help cool soaring prices.
Crude oil has traded consistently above $100 a barrel since February, which has pushed up the cost of living in many countries.
The White House hopes that the 13 core members of the Organization of the Petroleum Exporting Countries (OPEC) will decide to boost oil supplies. But that is not a matter of course.
Opec was formed in 1960 as a cartel with the aim of determining world oil supply and its price.
Saudi Arabia is the single largest producer in the cartel, and after meeting Saudi Crown Prince Mohammed Bin Salman, President Biden said he expected supply to increase.
However, Saudi officials have also stressed that any decision to increase deliveries would be made in consultation with Opec+.
Opec+ is a larger group of 23 oil-exporting countries, including Russia, that meets in Vienna every month to decide how much crude oil to sell on the world market.
Back in April 2020, Opec+ introduced a series of cuts that continued throughout the coronavirus pandemic as demand fell. Since 2021, this missing supply is slowly being restored.
At the last meeting of the group, Opec+ decided to slightly increase the number of barrels produced for the month of August.
But just turning on the taps full might not be that easy. At least on paper, several cartel members such as Angola, Nigeria and Malaysia are already struggling to meet their existing monthly delivery targets.
At the same time, Russian supplies have also fallen due to Western sanctions. Moscow, meanwhile, has expanded supplies to customers in Asia such as China and India.
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Lynchpin, Saudi Arabia, along with its neighbor the United Arab Emirates, are the only two major players with some spare capacity.
However, Saudi’s production target for August is 11 million barrels of oil per day, which energy experts say is already at a very high level and leaves little room for further increases.
Perhaps more important to the pair’s decision, however, is uncertainty about energy demand in the coming months.
Rising interest rates, the war in Ukraine and an impending recession in many western countries could seriously affect demand.
Experts believe these factors may be keeping the group cautious and unwilling to dramatically increase production.
“The concern for Saudi Arabia and Opec+ is that there are so many unknowns. Nobody knows where the oil markets will be in six months or next year,” said Karen Young, senior fellow at the Middle East Institute in Washington DC.
She added that this means the Saudis and UAE want to use their reserve stocks wisely.
“They don’t want to get into a situation where they use their limited spare capacity to ramp up production and then suddenly when demand spikes or falls in the future, they don’t have room to make adjustments,” She added.
Before invading Ukraine, Russia was the third largest oil producer in the world after the US and Saudi Arabia. It accounted for 8-10% of the world’s oil supply.
Market analysts believe President Vladimir Putin wants to perpetuate high oil prices to keep paying for the war in Ukraine and stave off the effects of crippling western economic sanctions.
For Saudi Arabia, unity within the Opec+ group is paramount and it would avoid any decision that could jeopardize that.
Opec itself forecasts that global oil demand will increase in 2023, albeit at a slower pace than this year.
Its analysts say this will be partly due to progress made in containing the coronavirus in China.
Estimates from the International Energy Agency and the US Energy Information Administration, meanwhile, suggest oil demand will continue to grow strongly despite rising inflation fears in several countries and slowing economic growth.
This means oil producers may need to pump oil as fast as they can five years from now to balance supply and demand – a major challenge given capacity constraints and lack of investment downstream and refining.
“There’s a lot of volatility in the markets, but not many people are expecting a sustained drop below $100 a barrel,” said Ben Cahill, a senior fellow at the Center for Strategic and International Studies in Washington.
Gasoline prices in the United States have already hit a 13-year high this year.
The US has released about a million barrels a day from its Strategic Petroleum Reserve (SPR) since April – as part of its plan to bring about 180 million barrels to market over a six-month period through the end of October.
Although Mr Cahill warned that once this rollout stops, supplies will become even tighter, putting greater pressure on prices.
“We still haven’t seen any signs of major investment to increase production. So if demand increases, we won’t have enough stocks to balance the markets,” he added.
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