IEEJ：June ©IEEJ 2022
Special Bulletin
A Japanese Perspective on the International Energy Landscape (588)June 9, 2022

Oil Prices Rising Despite OPEC-plus Decision on Production Increase
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan
Crude oil prices are rising gradually. On June 8, the front-month contract on the U.S.
benchmark West Texas Intermediate crude closed at $122.11 per barrel, up $2.70/bbl from the previousday, rising close to the recent high of 123.70/bbl that was reached on March 8 when the United States,
Canada and the United Kingdom announced their respective energy embargoes on Russia. The key
futures contract on the European benchmark Brent crude finished at $123.58/bbl, up $3.01/bbl, nearing
the March 8 high of $127.98/bbl.
The OPEC-plus group of oil-producing countries at its ministerial meeting on June 2 decided
to accelerate its monthly production increase from 0.43 million barrels per day to 0.65 million bpd in
July and August. The group had rejected major oil-consuming countries’ repeated requests for anaccelerated production increase over more than six months since crude oil prices’ rise above $80/bbl
last autumn. They had attributed crude oil price hikes to the geopolitical risk premium rather thansupply and demand factors, concluding that their planned or scheduled monthly production increase
would be enough.
At last, however, the group turned to the accelerated production increase at its latest meeting.
One apparent reason for the OPEC-plus decision may be that the European Union’s announcement ofa Russian oil embargo changed the group’s market assessment. Although pipeline oil imports fromRussia were excluded from the Russian oil embargo due to Hungary’s strong opposition to a fullembargo, the EU’s demonstration of its unity towards the embargo indicated a specific pathway to theembargo, beginning to exert upward pressure on crude oil prices.
The EU’s Russian oil embargo may lead Russia to sell EU-bound unsold oil at discounts toChina, India and other oil-consuming countries that do not participate in Russian oil embargoes. If aRussian export decline under the EU embargo is smaller than an increase in Russian exports to Chinaand India, a drop in Middle Eastern and other non-Russian oil imports into the two countries may besmaller than a cut in Russian imports into the EU, resulting in a tighter global supply-demand balance.
Changes in oil flow among Europe, Russia, China, India and the Middle East may not be limited tooil supply dislocation but close to disruption accompanied by a supply decline or a tighter supplydemand balance. Oil market participants anticipate such condition, exerting upward pressure on crude
prices.
Concerned about a potential increase in crude oil prices and its adverse impact, the UnitedStates has enhanced its request for the OPEC-plus group, including its leader Saudi Arabia, to increase
production further, contributing to the latest OPEC-plus decision to accelerate its production increase.
The U.S. Biden administration, plagued with its falling approval rates amid the gasoline price spike,has been politically eager to win the accelerated OPEC-plus production increase to suppress oil prices.
However, Saudi Arabia had refused to meet such U.S. request over the past six-plus months due totheir special relationship having soured.
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The Biden administration under its value-oriented foreign policy giving priority to humanrights and democracy has taken a tough attitude against Saudi Arabia over the killing of a Saudi
journalist and other problems, affecting the U.S.-Saudi relationship, according to some analysts. As
concerns have grown about crude oil price hikes and international energy market destabilization,
however, the United States and Saudi Arabia might have attempted to reconstruct their relationshipthrough various contacts behind the scenes. Some reports say that the two countries could arrange abilateral summit. In such situation, the OPEC-plus group announced a policy change to accelerate its
oil production increase.
Such OPEC-plus policy change to additionally increase production should have calmed
down crude oil prices. As noted at the outset of this report, however, crude oil prices have retained anupward trend. Why?
In summary, market participants have conceived that the decision to accelerate theproduction increase was designed to exert downward pressure on crude oil prices but has failed to beenough to do so. First, the actual production increase is expected to slip far below the target production
increase raised to 0.65 million bpd from 0.43 million bpd for the entire OPEC-plus group that includes
the Organization of the Petroleum Exporting Countries, Russia and others.
The target for the entire OPEC-plus group includes a target for Russia, meaning that theproduction quota for Russia is raised. As the EU’s Russian oil embargo takes effect, however, aRussian oil production decline may accelerate, resulting in actual production greatly deviating fromthe overall OPEC-plus target. Before the latest OPEC-plus meeting, Russia had been reportedlyexpected to be excluded from the additional production increase. In fact, however, OPEC led by Saudi
Arabia might have given priority to the maintenance of its cooperation with Russia, leading to thelatest decision.
Furthermore, many OPEC members have been producing crude oil at their full capacity andhave no room to expand production to meet the raised target. In this sense, only some OPEC members
including Saudi Arabia and the United Arab Emirates with sufficient surplus production capacity can
actually increase production. The accelerated production increase of 0.65 million bpd is thus expected
to end up as a pie in the sky. In this sense, Saudi Arabia and other OPEC members with surplus
production capacity hold the key to addressing crude oil price hikes and market destabilization.
There is another attention-attracting point regarding demand. That is the Chinese economic
trend. Crude oil prices will be sensitive to how the Chinese economy will recover from COVID-19
lockdowns. In general, global economic developments will exert influence on future oil demand andprices. However, oil market participants pay attention to the fact that China, the largest oil importer inthe world, has faced economic deceleration due to COVID-19 lockdowns and to the possibility that
Chinese oil demand could recover on the recent lifting of the lockdown in Shanghai. Depending on
China’s oil demand trend, crude oil prices may come under upward or downward pressure.
Further hikes in crude oil prices and international oil market destabilization will greatly
affect civic life and economic activities. They may further accelerate inflation that has become a great
matter of concern in Western countries. This is a serious problem for all oil consuming and importingcountries. For Japan and other countries with low energy self-sufficiency rates, the problem will bringabout massive national wealth outflow. As liquefied natural gas prices for Japan are indexed to crude
oil prices, oil price hikes will lead to higher LNG procurement costs that may be coupled with coal
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price hikes to push up electricity costs. Given that crude oil price hikes exert great influence on Japan’s
economy, industries and manufacturers as well as its civic life and society, we must be alert to thefuture oil price trend.

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