Major oil-producing countries led by Saudi Arabia and Russia agreed Sunday to maintain their current output levels in a climate of uncertainty and ahead of fresh sanctions against Moscow coming into force next week.
The representatives of the thirteen members of the Organization of the Petroleum Exporting Countries (OPEC) led by Riyadh, and their 10 allies headed by Moscow, decided to stick to their course agreed in October of a production cut of two million barrels per day until the end of 2023.
Sundayโs widely anticipated move was no โbig surpriseโ given that the economy has been โslowing somewhat, pushing oil prices below $90, despite the lower production levels,โ analyst Hans van Cleef with ABN AMRO said.
Collectively known as OPEC+, the alliance said Sunday that its October decision to cut output was โpurely driven by market considerationsโ, adding that it had been the โnecessary and right course of action towards stabilizing global oil marketsโ.
The OPEC+ output reduction in October represented the biggest cut since the height of the Covid pandemic in 2020, a move denounced by the United States as a concession to Moscow.
The next OPEC+ ministerial meeting is scheduled for June 4, 2023.
But the alliance said it was ready to โmeet at any time and take immediate additional measuresโ to address market developments and support the oil market if necessary.
Spotlight on Russia
On Friday, the EU, G7 and Australia agreed a $60-per-barrel price cap on Russian oil, which will come into effect on Monday or soon after, alongside an EU embargo on maritime deliveries of Russian crude oil.
It will prevent seaborne shipments of Russian crude to the European Union, which account for two thirds of the blocโs oil imports from Russia, an attempt to deprive Moscowโs war chest of billions of euros.
โWe will sell oil and oil products to countries that will work with us on market terms, even if we have to reduce production somewhat,โ Russiaโs Deputy Prime Minister Alexander Novak said after Sundayโs quick meeting via videoconference.
Even though โinflation, the tightening of monetary policies and Chinaโs Covid-19 epidemicโ were posing risks to the market, it was still โin a better state than two months agoโ, Novak said, according to Russian news agencies.
โWe are currently working on mechanisms to prohibit the use of the price cap tool at any levelโ, Novak added, stating that โsuch interferenceโ could only cause โfurther market destabilization and scarcity of energy resourcesโ.
Moscow had repeatedly denounced the incoming oil price cap, threatening to suspend deliveries to any country that adopted the measure.
But Ukraine suggested on Saturday that the cap should have been set even lower.
For OPEC+, the big unknown in the oil equation is how heavily sanctions will hit Russian supply.
โUncertainty on the impact on Russian oil production coming from the EU banโฆ and the G7 price cap and some easing of mobility restrictions in China likely supported the decision for a rollover,โ UBS analyst Giovanni Staunovo said.
โThe upside risks for oil prices from this point on will increaseโ due to the announced EU and G7 measures in combination with supply and demand expected to remain unchanged, Van Cleef said.
An โuncomfortable positionโ
Moscowโs threat to suspend deliveries to countries abiding by the price cap will put โsome in a very uncomfortable positionโ, said OANDA analyst Craig Erlam, โchoosing between losing access to cheap Russian crude or facing G7 sanctionsโ.
Amid economic gloom fuelled by soaring inflation and fears of Chinaโs weaker energy demand due to its Covid-related restrictions, the two global crude benchmarks remained close to their lowest level of the year, far from their March peaks.
Since the groupโs last meeting in early October, Brent North Sea oil and its US equivalent WTI have lost more than six percent of their value.
Moving forward, OPEC+ might still feel compelled to adopt โa more aggressive stanceโ by cutting or threatening to cut production, UniCredit analyst Edoardo Campanella said.
โRussia might also retaliate by leveraging its influence within OPEC+ to push for more production cuts down the road, thus exacerbating the global energy crisis,โ he added.
