OPEC and Russia to meet as global forces weigh on oil market

OPEC and Russia to meet as global forces weigh on oil market

Oil officials from OPEC and Russia will meet on Sunday to review production levels, just hours before the European Union begins an embargo on Russian oil and the Group of 7 industrialized nations and their allies impose a price cap on Kremlin crude.

With so much uncertainty, the group, known as OPEC Plus, may choose to stay put. In October, he drew fire from the White House and other quarters after announcing a cut of two million barrels a day.

The group may prefer a wait-and-see attitude, analysts say, as various forces play out in oil markets. Immediate challenges are the European Union embargo on most Russian crudes, which begins Monday, and a US-led plan to cap the price of Russian oil exported to other destinations at $60 a barrel. . The price, which locks in an existing discount on Russian crude from alternatives from other parts of the world, was agreed by European Union ambassadors on Friday, diplomats said, and is expected to be officially announced by the G7 on Sunday.

But these factors are only part of the problem facing OPEC Plus.

Global economic growth is slowing due to central bank interest rate hikes, supply disruptions and inflation. At the same time, oil demand from China, the largest fuel importer, has been dampened. Covid lockdowns that weighed on the country’s economy and manufacturing capacity. China’s oil imports in the coming months “will drop dramatically,” said Viktor Katona, an analyst at Kpler, which tracks shipping traffic.

That leaves OPEC Plus and its de facto leader Saudi Arabia with a tough call to make.

“They haven’t faced a period of this much short-term uncertainty in decades,” said Raad Alkadiri, managing director of energy, climate and resources at Eurasia Group, a venture firm. Politics.

The outcome of the price cap and embargo is difficult to predict, but their impact could quickly overshadow any initiative the Organization of the Petroleum Exporting Countries decides to take over the weekend – and its members are also likely to suffer some criticism in the West. if prices rise.

“It feels like a time when OPEC Plus would rather be in the background than in the spotlight,” said Richard Bronze, head of geopolitics at research firm Energy Aspects.

Yet the cut announced by OPEC Plus in October, despite pressure from the Biden administration to increase production to lower gasoline prices, should dampen any hope that Saudi Arabia and its allies will do otherwise. anything but acting in their own interest, according to analysts. Their primary objective is to seek to prevent the price of oil from falling.

Indeed, Prince Abdulaziz bin Salman, the Saudi oil minister, recently warned that the group remains “ready to intervene” by reducing supply to support prices. Analysts say that if oil prices fall in the coming weeks, OPEC Plus will not hesitate to cut production in January or February.

“I don’t think there’s anything stopping OPEC from taking oil off the market if they want to,” Alkadiri said.

The war in Ukraine, after huge disruptions to the oil and gas industry due to global Covid shutdowns, has created an opportunity for the Saudis and their OPEC allies.

With uncertainty over supplies from Russia, one of the world’s top energy producers, Saudi Arabia’s ability to produce additional oil has rarely been greater. This attribute, along with relatively high oil prices, now around $85 a barrel for Brent crude and $80 for West Texas Intermediate, gives Crown Prince Mohammed bin Salman, the kingdom’s top policymaker, confidence and confidence. revenues needed to pursue a more independent policy. of Washington than its predecessors.

But the propensity of Western governments to intervene in energy markets, an area OPEC sees as its competence, appears stronger than at any time in many years.

Many traders and investors are skeptical about the effectiveness of the price cap and the Russian oil embargo. But the moves threaten the Saudis and other producers, analysts said, because they could turn into a form of buying cartel, reversing the roles of OPEC. The concern is that these Western initiatives could result in “the ability to determine what type of oil is good oil” and how much it should cost, said Karen E. Young, senior fellow at the Columbia University Center on Energy Policy.

What seems likely is that tensions between the West and the Saudis and their allies will persist. Europe will want Middle Eastern producers to help replace lost Russian oil. But the Saudis are unlikely to want to appear to be taking sides against Russia, which has been a useful ally on oil issues since striking a deal with OPEC in 2016. Prior to that, Moscow took advantage OPEC production cuts to sell more of its own oil. .

Europe faces a truly gargantuan task. First, it must replace a major source of crude oil when the Russian embargo begins on Monday; then, in February, the embargo extends to Russian refined products, such as diesel. Much of the shift is already underway, with tankers bringing oil to Europe from the United States, Brazil, Guyana and the Middle East.

For this reason, analysts say, Europe could escape major problems – at least in the early days. “There could be a bit of disruption in the early days,” said Josh Folds, an analyst at FGE, a consulting firm. He said the plan to phase out Russian refined products in February could create bigger problems, especially for diesel, which Europe imports from Russia in large quantities.

Oil markets have also been quiet, remaining just below $90 a barrel for Brent, the international benchmark, a price level analysts say the Saudis want to defend.

But a lot of things could also go wrong. Global oil trade is being re-routed, often with much longer journeys, straining the maritime fleet. And while it is widely believed that Russian President Vladimir V. Putin will allow operations to continue as usual while the embargo and price cap go into effect, some analysts fear he is starting to hold back or clog the oil, using the fuel as a weapon. in the war in Ukraine just as it did by cutting natural gas supplies to Europe.

“We’ve seen more and more that Russia has done things that are driven by politics rather than economics when it comes to energy exports,” Bronze said.

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