Oil Price: Ukraine & the OPEC Meeting

With crude up at $100/bbl thanks to the invasion of Ukraine, global oil producers are looking to increase output in a bid to stabilize prices. Can they succeed under these circumstances?

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Increasing oil production

This week it was reported that the IEA was studying the possibility of releasing as much as 70 million barrels of oil to control prices. As many as 60 million of those barrels would reportedly come from the US. Although the oil price came off its recent highs, it failed to fall far below triple digits. 

On Wednesday, OPEC is due to meet to decide what to do with oil production. The broad consensus is that the cartel will stick with its already agreed-on trajectory and raise production by an additional 400K bbl/day as part of its established plan to match demand slowly. On Sunday, OPEC cut its forecast for this year's surplus to 1.1M bbl from 1.3M in its prior assessment. In other words, the technical committee still believes that supply and demand will balance out in the course of the year.

No supply issues yet

So far, there has been no attestation of gas or oil supply interruptions through Ukraine despite fighting in cities near gas lines. The supply situation remains the same as before the start of the conflict in Ukraine. 

Price action, therefore, is arguably being driven more by uncertainty and speculation about further escalation of the crisis and/or sanctions on Russia, not oil shortages. Increasing supply is unlikely to solve the problem of geopolitical uncertainty. At least, that's the view of Energy Intel's Amena Bakr, Chief OPEC Correspondent at Energy Intelligence. 

Meanwhile, the Ukraine-Russia talks meant to broker a ceasefire ended with only an agreement to meet two days after, with each side reporting back to their respective principals. That's two more days when something can happen to the oil supply, even if by accident.

Light Crude: Retrying $100

Crude oil trades at 8-year highs well above its 200 and 50-day averages. Although it received initial rejection above the $100/bbl threshold, the immediate drop to $90/bbl was bought up by investors. Now, we are back near the top.

Supports lie at 95 then the 50-day average near $93/bbl and its 200-day equivalent at around $88/bbl. 

The recent high of over $100/bbl would act as bears' first line of defence. Above there, $105/bbl could be the next logical target. 

Key takeaways

The impact of the IEA and OPEC's plan to expand the supply-side of the oil market may mean lower prices near term but the effects could be short-lived if uncertainty around Ukraine remains. 

If investors continue to focus on Ukraine, how the war might impact gas and oil flow at major lines' locations, and more sanctions against Russia - then any supply-side impact from oil producers won’t have the desired effect. Perhaps for that reason, OPEC in coordination with Russia is unlikely to expand output.