Explained | OPEC+ production cut, G7 price cap on Russian crude: Key triggers for global oil market – Moneycontrol

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The global oil market is likely to stay volatile in the coming weeks as the sanctions on Russian oil are about to kick in. The market will take further cues from the upcoming meeting of the Organization of Petroleum Exporting Countries-plus (OPEC+) on December 4. The European Union’s (EU) likely cap of $60 a barrel on Russian seaborne crude oil imports will majorly impact the course of oil prices this month year and in 2023.
Also Read: Russia not bothered by oil price cap; will negotiate directly with partner countries: Sergey Lavrov
How has crude performed so far?
After a few months of strength, crude futures are now flirting with lows not seen all year as top oil consumer China imposed additional Covid lockdowns, while central banks across the globe are on a course to hike interest rates in order to combat inflation.
Brent crude, which hit a 14-year high of more than $139 a barrel after Russia’s invasion of Ukraine, was trading at around $88 a barrel on Thursday, staging a modest recovery from near one-year lows of about $80 a barrel earlier in the week.
Amid the price rout, the next few weeks will likely see oil prices swinging, either way, depending on the OPEC+ decision on Sunday, the proposed price cap on Russian oil which will kick in from December 5, and the developments in China — that have been dragging down oil prices on a weak demand outlook, China being the world’s top crude oil importer.
Also Read: Global oil market signals short-term weakness ahead of EU ban on Russian oil
What will OPEC+ decide at the meeting?
OPEC+, a group of 23 oil-producing nations including Saudi Arabia and Russia, is set to meet to consider output levels on Sunday. OPEC+ is widely expected to stick to its latest target of reducing oil production by two million barrels per day (bpd) to protect prices. But according to Reuters, some analysts believe that crude prices could fall if the group does not make further cuts.
OPEC+ has switched its planned in-person meeting in Vienna to a virtual one, which signals little likelihood of a policy change. Sources told Reuters that OPEC+ now wants to assess the impact of a looming Russian oil price cap on the market and get a clearer picture of China, where an easing of stringent Covid restrictions is expected after large-scale demonstrations.
However, analysts such as the Eurasia Group, and some OPEC+ delegates, have said that a further cut should not be ruled out due to low demand from slowing economies.
“Market fundamentals favour another cut, especially given the uncertainty over China’s Covid situation,” said Stephen Brennock of oil broking firm PVM.
In October 2022, OPEC+ had agreed to cut output by two million bpd, equal to two percent of global supply, effective until December 2023, causing one of its biggest clashes with the West as the US administration called the surprise decision short-sighted.
Graphic designed by Upnesh Raval/Moneycontrol Graphic designed by Upnesh Raval/Moneycontrol
What’s expected from the G7-EU price cap on Russian oil?
The European Union (EU) governments tentatively agreed on Thursday to a $60 a barrel price cap on Russian seaborne oil — an idea proposed by the Group of Seven (G7) nations — with an adjustment mechanism to keep the cap at five percent below market price.
The price cap is set to kick in on December 5, hours after the OPEC+ meeting, replacing the harsher EU ban on buying Russian seaborne crude, as a way to safeguard the global supply chain network since Russia produces 10 percent of the world’s oil.
The idea of enforcing the G7 cap is to prohibit the shipping, insurance, and re-insurance companies from handling cargoes of Russian crude around the globe unless the price it is sold at is less than or equal to the price cap. As the world’s key shipping and insurance firms are based in G7 countries, the price cap would make it difficult for Moscow to sell its oil at a higher price.
The initial G7 proposal last week was for a price cap of $65-$70 per barrel with no adjustment mechanism. Since Russian Urals crude already traded lower, Poland, Lithuania, and Estonia rejected that level as not achieving the objective of cutting Moscow’s revenues and its ability to finance the invasion of Ukraine.
However, on Thursday, EU diplomats said that Lithuania and Estonia, which had earlier supported Poland’s push to set the cap as low as possible, were also on board with the $60 limit. The price cap level would be reviewed every two months, according to EU diplomats.
Also Read: India will ‘benefit’ from price cap on Russian oil: US Treasury Secretary Janet Yellen
What’s happening in Asia?
In China, traders are worried about over-supply if China and India continue importing large amounts of discounted Russian oil. At the same time, additional Covid restrictions in the country are expected to weigh on oil demand.
Hardeep Singh Puri, India’s Minister for Petroleum and Natural Gas, has repeatedly said that the country was under no pressure to accept the price cap. But a Reuters report indicated that Indian refiners are wary of buying Russian crude loading at a higher rate after December 5, once the proposed price cap kicks in.
Commenting on the macro factors affecting India, Mitul Shah, Head of Research – Institutional Desk, Reliance Securities, said in a note on December 1, “Though the economy is making a concerted effort to overcome its troubles, fast-changing geopolitics is casting a long shadow. We expect a recovery in the coming quarters led by softening commodity prices and monetary easing by central banks, which is likely to boost demand going ahead.
The movement of the Rupee, FII flows, and crude oil prices will dictate trends in the near term. Volatility is likely to persist due to the endless Russia-Ukraine crisis and new Covid cases in China.”
China and India, two of the world’s top three importers, had become Russia’s biggest customers after the West imposed sanctions on Russian oil post the outbreak of the Ukraine war.
Reduced buying by both the Asian giants would force Russia to chase other customers. Going forward, even if Moscow offers more favourable terms, India and China are unlikely to be able to buy much more Russian crude as they have several long-term contracts with rival producers, such as Saudi Arabia and the United Arab Emirates (UAE).
Also Read: Explained | How will the EU ban on Russian oil impact India?
What next?
The move to deprive Moscow of funds will create more uncertainty for oil markets and add to the pressure on oil prices, including diesel, said the Paris-based International Energy Agency (IEA) in its monthly report.
“A proposed oil price cap may help alleviate tensions, yet myriad uncertainties and logistical challenges remain… the range of uncertainty has never been so large,’’ said the IEA.
Russia exports around 20 million tonnes of crude per month — roughly five million bpd — via several routes, including the Druzhba pipeline to Europe, and pipelines (added, please see) to Asia.
According to the IEA, rerouting of global trade flows as Russia seeks to export more oil to non-EU markets, and as the EU buys from elsewhere, could ease the pressure on oil and oil product supplies, but a strong demand for scarce oil tankers could pose challenges.
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