OPEC+ oil producers face uncertainty over Russian sanctions

FRANKFURT – The Saudi-led OPEC oil cartel and allied producer countries, including Russia, are expected to decide how much Oil to supply the global economy amid flagging demand in China and uncertainty about the impact of new western sanctions against Russia that could take significant amounts of oil off the market.

The OPEC+ alliance of 23 countries is scheduled to meet on Sunday, a day ahead of the scheduled start of two measures aimed at pounding Moscow’s oil revenues in response war in Ukraine. That’s a European Union boycott of most Russian oils and $60 a barrel Price cap for Russian exports imposed by the EU and the Group of Seven democracies.

Russia rejected the price cap approved on Friday and threatened to cut off supplies to the nations that supported it.

Oil traded lower on fears of the outbreak of the coronavirus China’s strict zero-COVID restrictions would reduce demand for fuel in one of the world’s largest economies. Worries about recessions in the US and Europe also raise the prospect of lower demand for gasoline and other fuels made from crude oil.

This uncertainty is the reason why OPEC+ in October for a Cut production by 2 million barrels per day from November, which some saw as a possible move to help Russia get through the European embargo. The impact had some limitations as OPEC+ countries are already unable to meet their quotas.

With the world economy is slowing down, oil prices have fallen since summer highs, with international benchmark Brent closing at $85.42 a barrel on Friday, compared with $98 a month ago. That has eased Gas prices for drivers in the USA and around the world.

On the other hand, the price cap and EU boycott could take an unknown amount of Russian oil off the world market, tightening supply and driving up prices. To prevent a sudden loss of Russian crude oil, the price cap allows shipping and insurance companies to ship Russian oil to non-Western countries at or below this threshold. Most of the world’s tanker fleet is covered by insurers in the G-7 or the EU.

Russia would likely seek to circumvent the cap by organizing its own insurance and using the world’s shadowy fleet of off-the-books tankers, as Iran and Venezuela have done, but that would be costly and cumbersome, analysts say .

Given these uncertainties for the global oil market, Saudi Arabia-led OPEC oil ministers could leave production levels unchanged or cut production again to prevent prices from falling further. Low prices mean less revenue for producer country governments.

“We believe the meeting will be fairly brief and the alliance will remain committed to current production targets,” said Gary Peach, oil market analyst at Energy Intelligence. Standing Pat makes sense, “even more so because oil is at $87 a barrel (early Friday) which is a good price for everyone. … Of course $98 is better, but for now I think they see the market as reasonably priced and adequately supplied and there’s no reason to rock the boat.

In contrast, analysts at Clearview Energy Partners expect OPEC+ to announce a production cut of 1 million barrels per day. Some members are underproducing, which is more like a production cut of about 580,000 barrels per day.

A cut of that magnitude would not cause a global supply problem, even factoring in the EU ban on Russian oil, which is expected to pull another 1 million barrels off the market, said Jacques Rousseau, chief executive of Clearview Energy Partners. Oil consumption decreases in winter, partly because fewer people drive.

But the G-7 price cap could prompt Russia to retaliate and take more oil off the market. The Saudis “would likely share the Kremlin’s interest in crushing the nascent G-7 buyers’ cartel,” said Kevin Book, another Clearview executive.

The $60 a barrel cap is close to the current Russian oil price, meaning Moscow could continue selling while opposed to the cap in principle.

“If Russia ends up taking more than about a million barrels a day of oil, the world will run out of oil and there should be a balance somewhere, whether from OPEC or not,” Rousseau said. “That will be the key factor – finding out how much Russian oil is really leaving the market.”

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Bussewitz reported from New York.

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https://www.local10.com/business/2022/12/04/opec-oil-producers-face-uncertainty-over-russian-sanctions/ OPEC+ oil producers face uncertainty over Russian sanctions

Sarah Y. Kim

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