OPEC+ mulls further oil production cuts ahead of Russia sanctions and proposed price cap

OPEC and non-OPEC oil producers could impose deeper oil production cuts on Sunday, energy analysts said, as the influential energy alliance weighs the impact of an impending ban on Russian crude exports and a possible cap on Russian oil prices.

OPEC+, a group of 23 oil-producing nations led by Saudi Arabia and Russia, will meet on Sunday to decide the next phase of production policy.

The highly anticipated meeting comes ahead of potentially disruptive sanctions on Russian oil, weakening demand for crude in China and growing fears of a recession.

Claudio Galimberti, senior vice president of analytics at energy consultancy Rystad, told CNBC from OPEC headquarters in Vienna, Austria, that he thinks the group “better stay the course.” ” and renew the existing production policy.

“OPEC+ is rumored to be considering a cut based on weak demand, particularly in China, over the past few days. Yet Chinese traffic nationwide has not dropped dramatically,” Galimberti said.

Energy market players remain wary of European Union sanctions over purchases of Kremlin maritime crude exports on December 5, while the prospect of a G-7 price cap on Russian oil is another source of uncertainty.

The bloc of 27 EU countries agreed in June to ban the purchase of Russian maritime crude from December 5 as part of a concerted effort to reduce the Kremlin’s war chest after the invasion of the Ukraine via Moscow.

Fear that an outright ban on Russian crude imports could send oil prices skyrocketing, however, has prompted the G-7 to consider a price cap on how much it will pay for Russian oil.

No formal agreement has yet been reached, although Reuters reported on Thursday that EU governments had tentatively agreed to a cap of $60 a barrel of Russian oil transported by sea.

“The other factor that OPEC will have to take into account is indeed price caps,” Galimberti said. “It’s still up in the air, and it adds to the uncertainty.”

The Kremlin has previously warned that any attempt to impose a price cap on Russian oil will cause more harm than good.

OPEC+ agreed in early October to cut production by 2 million barrels per day from November. He came despite calls from the United States for OPEC+ to pump more to lower fuel prices and help the global economy.

The energy alliance recently hinted that it could impose deeper production cuts to spur a recovery in crude prices. The signal came despite a Wall Street Journal report suggesting a 500,000 barrel-per-day production increase was under discussion for Sunday.

Speaking earlier this week, Helima Croft of RBC Capital Markets said there was no expectation of a production boost at the upcoming OPEC+ meeting and a “significant chance” of a greater reduction in production.

“There’s so much uncertainty,” Croft told CNBC’s “Squawk Box” on Tuesday. OPEC delegates “have to take into account what is happening with China but also what is happening with Russian production”.

“I currently expect that if prices flirt with Brent going into the 70s that OPEC will definitely cut more, but the question is how do they factor in what’s to come? the day after ?” said Croft. “So I still think it’s up for grabs.”

Oil prices, which have fallen sharply in recent months, were trading slightly lower ahead of the meeting.

international Brent futures traded down 0.2% to $87.78 a barrel on Friday morning in London from more than $123 in early June. US West Texas Intermediate Futures Contractsmeanwhile, fell 0.3% to trade at $80.95 from a level of $122 six months ago.

“Barring any negative surprises at Sunday’s virtual OPEC+ talks and assuming a healthy compromise on Russia’s oil price cap before EU sanctions take effect on Monday, it’s tempting to conclude boldly that the bottom has been found,” Tamas Varga, an analyst at brokerage PVM Oil Associates, said in a note Thursday.

Varga said oil prices trading below $90 a barrel were “not acceptable” to OPEC and that Russia needed to introduce retaliatory measures against those signing the G-7 deal.

“Rubber and jittery market conditions will prevail, but the new month should bring more joy than November,” he added.

Jeff Currie, global head of commodities at Goldman Sachs, said OPEC ministers are expected to discuss whether to adjust to further weak demand in China.

“They have to deal with the fact that, hey, demand is down in China, the prices reflect that, and are they adjusting to that weak demand?” Currie told CNBC’s Steve Sedgwick on Tuesday.

“I think there is a high probability that we will see a reduction,” he added.

Analysts at political risk consultancy Eurasia Group said lower oil prices “raise the risk” of another OPEC+ production cut.

“Ultimately, the decision will depend on the trajectory of the price of oil when OPEC+ meets and the extent of the disruption evident in the markets due to EU sanctions,” analysts said Monday. Eurasia Group led by Raad Alkadiri in a research note.

If Brent futures fall below $80 a barrel for an extended period ahead of the meeting, Eurasia Group said OPEC+ leaders could push for another production cut to support prices. and bring Brent futures back to around $90 – a level “they seem to be favoring.”