The Saudi-led OPEC oil cartel and allied producers including Russia did not change their targets for shipping oil to the global economy amid uncertainty about the impact ofthat could take significant amounts of oil off the market.
The decision at a meeting of oil ministers Sunday comes a day ahead of the planned start of two measures aimed at hitting Russia’s oil earnings in response to its invasion of Ukraine: a European Union boycott of most Russian oil, and a price cap of $60 per barrel on Russian exports imposed by the EU and the Group of Seven democracies.
It is not yet clear how much Russian oil the two sanctions measures could take off the global market, which would tighten supply and drive up prices. The world’s No. 2 oil producer has been able to reroute much, but not all, of its former Europe shipments to customers in India, China and Turkey. The impact of the price cap is also up in the air because Russia has said it could simply halt deliveries to countries that observe the limit but would likely also find ways to evade the cap for some shipments.
On the other side, oil has been trading at lower prices on fears that coronavirus outbreaks and China’s strict zero-COVID restrictions would reduce demand for fuel in one of the world’s major economies. Concerns about recessions in the U.S. and Europe also raise the prospect of lower demand for gasoline and other fuel made from crude.
That uncertainty is the reason the OPEC+ alliance gave in October for slashing production by 2 million barrels per day starting in November, a cut that remains in effect. Analysts say that took less than the full amount off the market since OPEC+ members already can’t meet their full production quotas.
With the global economy slowing, oil prices have been falling since summertime highs, with international benchmark Brent closing Friday at $85.42 per barrel, down from $98 a month ago. That has eased gasoline prices for drivers in the U.S. and around the world.
Average gas prices have fallen for U.S. drivers in recent days to $3.41 per gallon, according to motoring club federation AAA.
To prevent a sudden loss of Russian crude, the price cap allows shipping and insurance companies to transport Russian oil to non-Western nations at or below that threshold. Most of the globe’s tanker fleet is covered by insurers in the G-7 or EU.
Russia would likely try to evade the cap by organizing its own insurance and using the world’s shadowy fleet of off-the-books tankers, as Iran and Venezuela have done, but that would be costly and cumbersome, analysts say.
Facing those uncertainties for the global oil market, OPEC oil ministers led by Saudi Arabia could leave production levels unchanged or cut output again to keep prices from declining further. Low prices mean less revenue for governments of producing nations.
Maintaining OPEC production targets makes sense because “right now I think they see the market as adequately priced, adequately supplied, and there’s no reason to rock the boat,” said Gary Peach, oil markets analyst with Energy Intelligence.
The G-7 price cap could prompt Russia to retaliate and take oil off the market. But the cap of $60 a barrel is near the current price of Russian oil, meaning Moscow could continue to sell while rejecting the cap in principle. Oil use also declines in the winter, in part because fewer people are driving.
“If Russia ends up taking off more oil than about a million barrels per day, then the world becomes short on oil, and there would need to be an offset somewhere, whether that’s from OPEC or not,” said Jacques Rousseau, managing director at Clearview Energy Partners. “That’s going to be the key factor — is to figure out how much Russian oil is really leaving the market.”