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Amid oil market, OPEC and Russia leave output unchanged

OPEC and its allies, including Russia, said on Sunday they would leave their oil production quotas unchanged. The group, known as OPEC Plus, appeared to have decided on a conference call that there was no reason to change policy amid widespread uncertainty in the oil market.

On Monday, the European Union will launch an embargo on Russian oil, while the Group of 7 industrialized countries and their allies impose a price cap of $60 a barrel on Russian crude.

The impending embargo and price cap were the main reasons why the producer group held its fire. The outcome of these moves for oil markets is yet to be determined, but they could affect millions of barrels per day of Russian oil. OPEC may have decided it was better to keep its head down rather than risk being blamed if, for example, prices jump in the coming days.

The Biden administration had criticized the Saudis, the de facto leaders of OPEC Plus, for orchestrating a production cut of two million barrels a day, or about 2% of global oil production, in the last group meeting in October. The announcement, the first major production cut in two years, was seen as an attempt to support oil prices.

In a press release after its Sunday meeting, OPEC Plus defended the October production cut, saying it was now recognized by market participants as “necessary and the right course of action.”

Since oil is ordered several weeks in advance, the production cuts announced in October have only started to work in the market in recent weeks. In addition, releases from US strategic stock are shrinking.

The Saudis, who are absorbing most of the production cuts, likely want to wait and see if the production cuts and the end of reserve releases compensate for weaker demand, especially in China, the largest oil importer. in the world, where Covid lockdowns are hampering industry production and overall economic activity.

Although the full group will not meet until June 2023, the press release said it was ready “to meet at any time and take immediate additional action to address market developments.”

Brent crude, the international benchmark, was $85.57 a barrel on Friday, down from over $110 in June, while West Texas Intermediate crude was around $80 a barrel. Many analysts say the Saudis are determined to seek a price of around $90 a barrel for Brent and will cut production, regardless of protests from the West, if prices drop significantly from at this level.

Analysts say the outlook for the oil market in the coming weeks is uncertain. On Monday, an embargo on Russian crude oil shipments to European Union ports will begin, followed by a ban on Russian refined products, such as diesel, on February 5.

Monday’s embargo will be accompanied by a ban on shipping and insurance companies, mainly based in Europe, from handling Russian crude priced above $60 a barrel.

The price cap initiative, which was led by the United States and endorsed by the Group of 7 countries, Australia and the European Union, aims to reduce the revenue Moscow has to fund its war in Ukraine, while encouraging the Kremlin to sell oil to key customers outside the European Union to avoid a global oil shock.

Analysts and traders are skeptical of the effectiveness of the price cap, as it can be difficult to administer and will mainly hit large customers of Russian oil like India and China, which have not taken the side of the West in the war with Ukraine. US officials have argued they are trying to avoid a sudden contraction in supply and the resulting spike in petrol and heating oil prices as the EU embargo takes hold.

Russia has said it will not agree to price caps and has threatened to cut off supplies to countries that comply. Analysts say Russia has built a so-called “ghost fleet” of old tankers to manage its oil and avoid sanctions, but they doubt it can assemble a large enough flotilla. If not, Russia may have to start shutting down the wells. But Moscow has managed to maintain much higher production than many analysts had expected at the start of the war in Ukraine.

The coming weeks could see an interaction between the growing difficulties Russia is likely to have in selling its oil and the effects of a slowing global economy. China will be a key factor. Lockdowns are reducing import demand there. But widespread protests against these restrictions have been followed by some relaxation of “zero Covid” rules, offering some hope for a gradual easing and a rebound in fuel consumption.

Currently, oil markets are betting that these significant shifts can be managed smoothly. But they can be wrong.

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