OPEC+ swings for a long time

The OPEC + alliance decided to take a break and not yet respond to the Western coalition’s introduction of a ceiling on prices for Russian oil. At a meeting on December 4, the OPEC + countries decided to leave production quotas at the current level and meet for the next meeting on February 1. Most analysts see the move as justified in the face of massive market uncertainty: oil demand could shrink as lockdowns continue in China, but supply could drop even further if some of Russia’s production is pulled off the market as a result of the ceiling and the European embargo.

The OPEC+ countries decided not to reduce production quotas for the time being, thereby not actively defending Russia’s position against the background of the entry into force on December 5 of the ceiling on Russian oil and the European oil embargo. At a meeting on December 4, OPEC+ ministers reaffirmed their October decision to cut quotas by 2 million barrels per day from November, noting that quotas are planned to be maintained at this level until the end of 2023. The meeting, unlike previous OPEC+ meetings, was held online, which led many analysts the day before to believe that a serious discussion of a change in the alliance’s policy was not planned. Russian Deputy Prime Minister Alexander Novak, commenting on the decision of OPEC + for Russia 2, said that the ministers can get together at any time and “correct the situation on the market, but at the moment this is not needed.” The next scheduled meeting of OPEC + is still expected on February 1.

From December 5, the EU will no longer buy sea shipments of Russian oil, although there are exceptions to this rule for Bulgaria and, in theory, for Hungary. For Russian oil companies, this means the need to redirect about 1 million barrels per day of oil exports to other markets. Simultaneously, from December 5, the price ceiling for Russian oil, which the EU countries, the G7 and Australia officially approved on December 3, will come into force.

The price ceiling implies that the companies of these countries cannot provide brokerage, shipping, insurance and other services for the sea transportation of Russian oil to third countries, unless this oil is sold at a price below the ceiling.

The ceiling is set at $60 per barrel, but it is scheduled to be reviewed as early as mid-January, while the Western coalition intends to set the ceiling at least 5% lower than the market price for Russian oil, according to the IEA. Theoretically, this means that the level of the ceiling, if it really affects the price of Russian oil, should be constantly reduced.

Russia has already said it will not comply with the ceiling and, according to Alexander Novak, plans to ban its companies from doing so.

The implementation of this ban may prove difficult and will require precise wording from the Russian authorities, since in early December, according to Platts, the cost of Urals had already dropped to $54 per barrel, that is, it was below the ceiling. On the other hand, if Russian oil companies do lose access to the services of European shipping and insurance companies, they probably will not have enough tankers to redirect all European exports to the more distant markets of Asia. In this case, part of Russian oil will leave the market (Alexander Novak explicitly pointed out this possibility on December 4), which could probably lead to higher prices.

On the other hand, global fuel consumption tends to decrease in winter. The main unknown factor remains demand in China, where the authorities cannot unambiguously decide whether to continue the tough policy to combat the coronavirus, which leads to a slowdown in the economy. Previously, most analysts expected the lockdowns to ease by early next year, but now this forecast is not so clear.

Some analysts assumed that OPEC would more defiantly support Russia amid the introduction of a price ceiling, since this mechanism is extremely dangerous for the entire alliance in the future and could give control over the oil market from a cartel of producers to a “cartel of consumers”. However, for now, OPEC’s reaction remains expectant. “Oil is $87 a barrel, which is a good price for everyone. Of course, $98 would be even better, but I think right now they believe that the market is adequately priced and adequately supplied, so there is no reason to rock the boat, ”explains the logic of the decision, Energy Intelligence oil analyst Gary Peach (quoted by Reuters ).

The main question is what exactly will be the consequences of sanctions for Russian exports. December shipments have already been sold, so the first signs of a reduction in shipments may appear in the middle of the month, when the January shipments are due to be sold.

“The key factor is how much Russian oil will actually leave the market,” says Jacques Rousseau, managing director of Clearview Energy Partners. “If we talk about more than 1 million barrels per day, then there will be a shortage of oil in the world.”

Yuri Barsukov