Home Finance & Markets The U.S. and OPEC+ are exchanging crude oil blows

The U.S. and OPEC+ are exchanging crude oil blows

OPEC+ decides to cut production by 2 million barrels per day, about 2% of world supply, from November 1. Official EU approval of the new sanctions on Russia is expected on October 7. The most painful for Russia should be introduction of oil price ceiling and a ban on legal services. The E.U. and the U.S. want buyers of Russian oil to pay between $40 and $60 per barrel for Russian oil.

US OPEC Oil War

On October 5, the European Union, nudged by the U.S, agreed to introduce a ceiling on oil prices in addition to a partial anti-Russian oil embargo. In response, the meeting of the OPEC+ Monitoring Committee decided to cut production by 2 million barrels per day, about 2% of world supply, from November 1. Producing countries are trying to boost global oil prices again while rejecting U.S. demands to significantly increase the supply of raw materials at an even lower cost. 

The Price ceiling for the Russian oil

On October 7, the official approval of the new sanctions on Russia is expected at the highest level – the meeting of the E.U. Council, which includes the heads of state and government of the E.U. member states. 

Among the latest round of sanctions, the most painful for the Russian economy and the state budget, according to European officials, should be the introduction by the E.U. countries following the G7 of an oil price ceiling and a ban on the provision of I.T., accounting, consulting and, most importantly, legal services to Russian companies and government agencies.

Obviously, these measures will have to be clarified by the European Commission. However, the price ceiling and denial of shipping to third countries if they purchase Russian oil at a price above the ceiling will be of interest to the rest of the world.

According to Russian Deputy Prime Minister Alexander Novak, a price of at least $70 per barrel is favourable for Russia. But experts say that the price ceiling will be lower than the figure.

“With the price of Brent crude around $90/barrel, and the discount for Russian oil around $20-$30/barrel in recent months, a ceiling would have to be below $60/barrel. The estimates of the cost of production for Russian oil vary by source but are generally thought to be below $40/barrel. Hence, the likely ceiling is probably between $40 and $60 per barrel,” says Daniil Manaenkov, an economic forecaster at the University of Michigan.

Then there is a question of the ban on oil transportation to third countries at a price above the established ceiling. Combined with the legal sanctions, Russian exporters will begin to curtail oil transportation by Greek, Cypriot and Maltese tankers without waiting for restrictions on transport by sea and possible sanctions on insurance services.

The U.S. Treasury came up with the concept of covering the price cap for Russian oil. In response to this insistence, the G7 conference on June 28 formally endorsed this proposal. Clearly, the attempt is not directed at G7 customers; the United States, the United Kingdom, and Canada have already imposed a total ban on Russian oil and oil products. The E.U. will implement the embargo in stages: on December 5, tanker transport of crude oil will be prohibited, and on February 5, imports of Russian oil products will be completely stopped. Only Japan will stay on the sidelines, although Japanese oil imports are minimal, unlike LNG. Also, Russian oil is not required to be transported to China by sea. At the same time, the ban on shipping is not enforceable. 

“There are no effective mechanisms in place to force large Asian economies to comply with the price cap. A potential designation of Russia as a state sponsor of terrorism by the Biden administration could provide such a mechanism, but at the moment, such a move appears unlikely. Without an effective mechanism to punish non EU/G7 countries for buying Russian oil at above-ceiling prices, enforcement will be challenging, and the price cap will only have a temporary effect on the oil market,” says Manaenkov. 

The U.S and Europe could lose more as the rest of the world may develop alternative shipping and insurance hubs. The process may hasten as such steps are already underway, starting with de-dollarisation

Who benefits from the price ceiling? 

Answer: emerging nations such as India and others. The U.S. and the E.U. want them to pay between $40 and $60 per barrel for Russian oil. 

“In recent months, the market discount for Russian oil has narrowed from around $40/barrel in the Spring of 2022 to around $20/barrel in recent weeks. The imposition of the cap and the associated restrictions could widen the market discount again, which buyers of Russian oil may welcome,” says Manaenkov.

Impact on Russia and OPEC +

Western sanctions and “voluntary” limitations imposed by several international oil dealers have already resulted in the Urals being supplied to the Asia-Pacific region and South Asia markets at a discount of up to $30 per barrel relative to the price of Brent in the spring. To balance the next year’s Russian budget, which is based on a cost of $70 a barrel, Brent needs to be quoted at a minimum of $100. After reaching $130 per barrel in March, prices dropped to $85.14 per barrel at the end of September. On October 5, however, the price of OPEC+ decisions steadied at $92.

There were three primary causes for the price decline: a comprehensive inventory of public and private oil storage facilities, especially in the United States. The second is the fulfilment of the OPEC+ production agreement. By October 1, quotas should have recovered to the level of April 2020 or 10 million barrels per day. Although, not all OPEC+ countries, including Russia, have met their full quotas. In August, Russia produced 9.9 million barrels per day instead of the permitted 11 million barrels per day.

The third factor is the decrease in previously expected global economic growth rates. Due to COVID-19 restrictions, China’s GDP growth is not likely to surpass 3-4 % this year. In Europe, according to the most recent World Bank assessment, the GDP may decrease by 1.2% in 2023 if Russia’s energy resources are completely rejected.

On the eve of the midterm elections for Congress on November 8, President Joe Biden was able to drastically cut domestic gasoline costs, which he deemed to be a very positive development.

The potential of a further decline in oil prices is undesirable for Russia and other major OPEC+ players such as Saudi Arabia, the United Arab Emirates, and Kuwait.

Customers may be suspicious of the E.U. move on price and shipping curbs. Vice President Alexander Novak and President Vladimir Putin have often said that Russia would not provide oil at an artificially low price. Consequently, the price may increase erratically after the fall due to the impending deficiency.

However, Manaenkov disagrees with the logic. “Per the summer round of E.U. sanctions, the flow of Russian seaborne oil to the E.U. was already scheduled to stop this December. Although unlikely, it is possible that Russia would choose to sell some of its oil to Europe at the ceiling price, potentially making the expected jump in OPEC’s share of the European market smaller,” he says. 

He also believes that the OPEC + production cuts do not respond to the E.U. move. “I think the cuts are likely reflecting the deteriorating global economic outlook, recent declines in oil price benchmarks, and possibly the pace of globally coordinated releases of strategic petroleum reserves,” he said.

The Oil game is on

POTUS Joe Biden called the OPEC +’s decision “disappointing and short-sighted.”  

State Secretary Antony Blinken spoke about potential punitive measures against several OPEC+ nations. He also mentioned exploring a variety of choices for Saudi Arabia, which Washington has been unable to persuade to compromise.

The sanctions imposed by the United States on Russia are now escalating into an economic and diplomatic war between the combined West and the rest of the world.

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