Major oil-producing countries agree to continue output levels

VIENNA: Major oil-producing countries led by Saudi Arabia and Russia agreed on 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 decision comes two days ater the Group of Seven (G7) nations agreed a price cap on Russian oil.

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.

Sunday’s widely anticipated move was no “big surprise” given that the economy has been “slowing somewhat, pushing oil prices below $90, despite the lower production levels,” analyst Hans van Cleef with ABN AMRO said.

Collectively known as Opec+, the alliance said on Sunday that its October decision to cut output was “purely driven by market considerations,” adding that it had been the “necessary and right course of action towards stabilising global oil markets.” The Opec+ output reduction in October represented the biggest cut since the height of the COVID-19 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 “meet at any time and take immediate additional measures” 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 ater, 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 bloc’s oil imports from Russia, an atempt to deprive Moscow’s war chest of billions of euros.

“We will sell oil and oil products to countries that will work with us on market terms, even if we have to reduce production somewhat,” Russia’s Deputy Prime Minister Alexander Novak said ater Sunday’s quick meeting via videoconference.

Even though “inflation, the tightening of monetary policies and China’s COVID-19 epidemic” were posing risks to the market, it was still “in a beter state than two months ago,” Novak said, according to Russian news agencies.

“We are currently working on mechanisms to prohibit the use of the price cap tool at any level,” Novak added, stating that “such interference” could only cause “further market destabilisation and scarcity of energy resources.”

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.

“Uncertainty on the impact on Russian oil production coming from the EU ban... and the G7 price cap and some easing of mobility restrictions in China likely supported the decision for a rollover,” UBS analyst Giovanni Staunovo said.

“The upside risks for oil prices from this point on will increase” due to the announced EU and G7 measures in combination with supply and demand expected to remain unchanged, Van Cleef said.

AN ‘UNCOMFORTABLE POSITION:’ Moscow’s threat to suspend deliveries to countries abiding by the price cap will put “some in a very uncomfortable position,” said OANDA analyst Craig Erlam, “choosing between losing access to cheap Russian crude or facing G7 sanctions.”

Amid economic gloom fuelled by soaring inflation and fears of China’s 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 group’s 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 “a more aggressive stance” by cutting or threatening to cut production, Unicredit analyst Edoardo Campanella said.

“Russia might also retaliate by leveraging its influence within Opec+ to push for more production cuts down the road, thus exacerbating the global energy crisis,” he added.

Algeria’s energy minister said on Sunday that the Opec+ decision to keep output unchanged was appropriate to market fluctuations, the country’s state news agency reported.

The Opec+ group will closely monitor crude markets for any developments, Energy Minister Mohamed Arkab said in remarks ater its Sunday meeting, adding that the decision kept Algerian output unchanged at 1.007mbpd.

The West’s sanctions against Russia is a complicated turn when G7, European Union and Australia had agreed to impose a price cap on Russian seaborne oil at $60 per barrel on Friday, taking the sanctions into a convoluted mode. Poland wanted a price cap which was 5 per cent lesser than the market price but it had joined in the collective decision.

The price cap would take effect from December 5 or thereater.

The logic behind the decision seems to show that there will be no stopping trade of Russian oil, but the price to be paid would not exceed US$60 per barrel.

It is felt that this will keep the Russian oil flowing into Europe and the rest of the Western world but it will reduce Russia’s capacity to use the oil revenues to wage war against Ukraine. The unqualified sanctions meant that the oil prices hot up because the scarcity that was created and this in turned fuelled the inflation in European and other markets.

The price cap strategy would keep the oil prices at a lower level and it is expected to stabilise oil prices.

What has not been considered is the impact of this price cap on the global oil market prices. Would this mean that the price cap against Russian oil will dampen oil prices elsewhere in the world.

Of course, there is the consideration that Russia is not in a position to meet the demand for oil of the world. It is confined to Europe. Secondly, the price cap is unlikely to impact Russia’s oil supplies to countries in the east like China and India. It is true that China and India might be buying Russian oil at a reduced price, but it would not be less than the cap price of US$60 per barrel.

The option of Russia shutting the oil and gas supplies to Europe cannot be ruled out, which could exert counter-pressure on Europe because of the demand for oil and gas in the winter months.

The trade war between Russia and the West is getting complicated.

Earlier, there was a blockade and no trade could be carried out. This gave rise to smuggling and made the blockade ineffective over a period of time. This was so when Napoleon imposed the continental blockade against England during the Napoleonic wars in the early years of the 19th century, and it petered out. The Western strategists might be assuming that price cap is a better way of making the sanctions effective without causing economic damage. But this could be unrealistic as well.

The sanctions and the price cap are sure to harm the Russian economy and its ability to carry on with the war in Ukraine. But it need not be so because sanctions and the price cap would have a negative impact on European countries as well.

Russia may not supply all the oil that Europe needs at a price fixed by Europe. If it is not a seller’s market, then it is also not a buyer’s market. Pressuring Russia on the economic front would not end the war in Ukraine. Russia has faced many setbacks on the battlefront, and the war is not going the way Russian President Vladimir Putin meant it to go. But the problem seems to lie with the under-prepared Russian armed forces more than Moscow’s inability to press on with the war.

The belief in the Western capitals that sanctions, including the price cap, would break the back of the Russian economy, and therefore make it incapable of waging the war sounds a theoretical rather than a practical proposition.

Ukrainian President Volodymyr Zelensky wants all the Ukrainian territories that Russia has occupied including Crimea to be restored to Kyiv. It is indeed a legitimate demand but it is politically not feasible.