The next few days will be one of the most crucial for the oil market in weeks, as several events and factors at the same time could determine the price trend by the end of this year and beyond. As China’s zero-Covid policy and protests against it weigh negatively on market sentiment, the OPEC+ meeting on December 4 and the start of the EU embargo on Russian crude oil imports by seaway the next day are likely to shape price developments. . Uncertainty is high, which would further fuel price volatility.
Oil fell early Monday to the lowest level in nearly a year – since December 2021, weighed down by risk aversion in commodity markets amid protests in China over the strict Covid restriction policy of authorities.
The recent price rout, with Brent falling 10% in a week, has intensified speculation that OPEC+ members may consider another production cut when they meet on Sunday, December 4. The following day, December 5, the EU’s import ban on Russian crude oil and the associated G7-EU price cap begins, with the exact cap price yet to be agreed and announced.
Related: Oil Prices Jump on Major Crude Drawdown
With so much uncertainty, oil prices swing and jump up or down with every rumor or report. Next week and beyond will likely see the same and prices could swing back and forth depending on the OPEC+ meeting, EU ban and Russian oil price cap and Russia’s reaction to this, and developments in China, which so far has been single-handedly dragging oil prices down on fears of weak demand from the world’s largest crude oil importer, less in the short term.
What will OPEC+ do?
A violent drop in prices began on November 21 after the Wall Street Journal reported, citing OPEC delegates, that cartel members had informally discussed whether more oil would be needed on the market given the EU embargo on imports of Russian crude oil . The report was immediately denied by OPEC’s top producer, Saudi Arabia, and another influential cartel member, the United Arab Emirates (UAE).
“The UAE has denied engaging in discussions with other OPEC+ members to modify the latest agreement, which is valid until the end of 2023,” said its energy minister, Suhail. al-Mazrouei. said November 21.
“We remain committed to the OPEC+ objective of balancing the oil market and will support any decision to achieve this objective,” the minister added.
A week later, starting November 29, speculation is mounting that OPEC+ could consider a haircut at its Dec. 4 meeting due to a bleaker-than-expected oil demand outlook amid China’s Covid restrictions and protests and slowing economies elsewhere.
Considering oil prices fell to their lowest level since December 2021 earlier this week, OPEC+ may indeed decide to defend an $80 floor below prices, but it will be difficult for them to predict how the embargo on Russian crude will affect trade flows and prices.
Still, speculation about a cut is gaining momentum. Early Tuesday, oil prices rose 2% as market participants weighed a possible further decline and perhaps bought the dip after the rout of the past few days.
Most traders and analysts surveyed by Bloomberg On Monday, OPEC+ expects further cuts to its overall production target, in addition to the 2 million barrels per day (bpd) cut that began this month.
Moreover, the structure of the oil futures market is showing signs sluggish global oil demand and sufficient supply just before the Russian oil embargo. Weakening physical demand and falling spot premiums for Middle Eastern crude could prompt OPEC+ to announce another cut on Sunday.
The Russian-led alliance of OPEC and non-OPEC producers routinely denies defending a certain oil price, but it always says it’s looking at market fundamentals. And these days, the physical market is showing signs of weakness and even short-term oversupply, given the contango of the first-month WTI and second-month Brent futures.
Iraq, OPEC’s second largest producer, reported this weekend that the OPEC+ meeting would focus on current market conditions and balances.
What will the G7-EU and Russia do?
Hours after the OPEC+ meeting, the EU embargo and Russian oil price cap come into effect. There is so much uncertainty surrounding the metrics that analysts can’t predict anything other than continued oil price volatility. The uncertainties range from the exact price of the ceiling – with the EU still at odds in those five days before the start of the embargo – how many ships would Russia need to place its oil with willing buyers, where ship-to-ship transfers can take place for Baltic exports bound for Asia, how big the “dark fleet” under the radar could be, and last but not least, whether Putin will keep his promise to stop supplying oil to anyone joining the price cap.
“All of these things are so important to the oil markets that they could push prices up in one direction to another very significantly,” said Michael Haigh, Global Head of Commodities Research & Strategy Societe Generale. The Wall Street Journal.
By Tsvetana Paraskova for Oilprice.com
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