Tough New Sanctions on Russian Oil Could Change OPEC+ Dynamics

The OPEC logo pictured ahead of an informal meeting between members of the Organization of the Petroleum Exporting Countries (OPEC) in Algiers, Algeria.

Ramzi Boudin | Reuters

OPEC+ is expected to stick to its current production deal for now, but behind the scenes oil-producing nations could be planning for a day when Russia’s contribution to global oil supply could be significantly reduced.

The European Union’s decision to ban most Russian oil and impose new sanctions on marine insurance could seriously hamper Russia’s ability to export crude. EU leaders agreed this week to an embargo on oil and petroleum products, with a temporary exemption for some oil delivered by pipeline.

“If they ban insurance on tankers carrying Russian oil, that will really make the barrel rush worse, and it’s definitely going to be a choppy summer,” said Daniel Yergin, vice president of S&P Global. “If you don’t have insurance, most reputable tankers won’t sail because the risks are huge.”

Most tanker insurance is underwritten by London-based insurers. “Insurance doesn’t get the same attention as barrels of oil, but insurance is important,” Yergin said.

This prospect of greater loss of Russian oil from the market and the potential for sharply higher and volatile prices is weighing on OPEC members, who have been asked by Western countries to supply more crude.

Ultimately, the cartel could increase the amount of oil on the market as Russian oil is reduced, but that likely won’t be part of any communication from OPEC on Thursday.

“I think they’re going to try to handle this gracefully with the Russians,” said Helima Croft, head of global commodities strategy at RBC. “I don’t think OPEC leaders are looking to humiliate Russia right now. I think they’re looking to thread the needle slowly. They’re tethered to the market and looking for a reset with the United States. .”

Croft said with just four months remaining in their current deal, OPEC+ is expected to put the expected 432,000 barrels per day back on the market at Thursday’s meeting.

She said that even if OPEC were to change its deal sooner, it’s unclear how much aid would be forthcoming, with limited spare capacity and no end in sight for the war in Ukraine.

The strategist, however, said there was a possibility that Saudi Arabia would “cancel” the deal before the official date as part of a “big deal” with the United States.

Relations between the kingdom and President Joe Biden’s White House have frayed. There is a chance that Biden could visit the country and meet Saudi Crown Prince Mohammed bin Salman when the president visits Israel in late June.

“We’ve been of the view since February that there’s a deal to be done if Washington can satisfy the kingdom’s key security and strategic concerns,” Croft noted. “During our visits to the kingdom this year, officials indicated that they were looking for a new partnership agreement with the United States and that energy would be part of this broader bilateral conversation.”

Croft said one of Saudi Arabia’s concerns was US talks for a new nuclear deal with Iran, but the chances of a deal now look slim and that could help relations with Riyadh.

“We believe there is momentum to increase Saudi production over the summer,” Croft said. “There were a lot of diplomatic moves behind the scenes.”

The EU ban is to be phased in and cover two-thirds of EU imports from Russia. The ban could ultimately limit 90% of Russian imports, based on promises from Germany and Poland to end imports from the northern part of the Druzhba pipeline.

By some estimates, previous sanctions have already affected about half of Russia’s exports, and broader sanctions could hamper them further, leaving global oil supplies very tight. Analysts say oil could retest the March high of $130.50 a barrel for West Texas Intermediate crude. WTI futures settled at $115.26 a barrel on Wednesday.

The EU’s decision to also block insurers from covering Russian oil shipments was unexpected by some market watchers. The move would affect tankers that travel the world and could undermine Russia’s efforts to sell its oil in Asia to countries like India and China.

“That, combined with the reopening in China, just adds further pressure on supplies,” Yergin said. “A combination of sanctions, no insurance and a Chinese recovery means a very, very, very tight oil market and a rush for supplies.”

John Kilduff, a partner at Again Capital, said Russian oil could be cut from the market but not entirely removed.

“We’re definitely in a tough spot right now, but the fact that with all this news and we still haven’t gotten back to the highs is telling,” he said. “It’s an art form of circumventing sanctions, and Iran wrote the book on it. India and China will continue to be buyers. There will be ship-to-ship transfers in the world. ‘darkness of the night. There’s not much you can do about it.’

Partly because of Russia’s export capacity, oil prices may rise no further than March highs. China is also a wildcard, Kilduff said, and its demand may not be as high as expected once it reopens its economy. Meanwhile, OPEC is also forecasting a supply glut of 1.5 million barrels per day for the rest of the year, he added.

The Wall Street Journal reported that some OPEC members were considering suspending Russia’s participation in the production deal as the sanctions affect its ability to pump more oil. But analysts don’t expect to see any signs of that at this week’s meeting.

“I think the group is also trying to decouple politics from economics. And economics dictates that if prices keep going up, you’re going to do a lot of damage to demand at this point,” said Francisco Blanch, head of commodity and derivatives strategy. at Bank of America. “We already had record diesel prices, record gasoline prices, and now we’re expecting record crude prices.”

But Blanch said OPEC may eventually put in place a new production plan that doesn’t rely on Russian crude.

Saudi Arabia is the only country that has spare capacity to produce and export more oil.

“What the group is looking at is how to avoid a shortage of rough that ultimately backfires on the group itself. come back,” Blanch said. “The question is how Russia reacts to this.”

Analysts say there is a risk of prices rising dramatically if Russia retaliates and cuts off Europe sooner than it plans to ban Russian crude.

“The thing to watch is if we get Russian militarization of exports,” Croft said. This could create a scenario where oil could soar, even hitting some forecasts of $185 a barrel.

As one of the world’s top three producers, Russia exported about 5 million barrels a day of crude and an additional 2.5 million barrels of refined products before the war in Ukraine. OPEC cannot cover all these losses.

When Iranian oil was sanctioned, Saudi Arabia was able to make up for lost barrels, Blanch said. “I think the point was that at the time the Saudis were much more engaged in the process,” he said. Russia being a leading player in the OPEC+ partnership, “it’s a much more sensitive subject”.

Kilduff said there may be more behind-the-scenes tension this week between some OPEC members and Russia than expected.

Saudi Arabia and Russia are likely to retain close ties even if US relations with the kingdom improve, but other members may be more interested in ending Russia’s role sooner, he said. -he declares.

“Some members of OPEC+ are definitely going to pull the knives out of Russia. This has all the elements of a Greek tragedy,” Kilduff said.

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