Amid Churning Oil Market, OPEC and Russia Leave Production Unchanged

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

Monday’s embargo will be coupled with a prohibition on shipping and insurance companies, mostly based in Europe, from handling Russian crude priced above $60 a barrel.

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

Analysts and traders are skeptical about how well the price cap will work because it may be difficult to administer and will mainly hit large customers for Russian oil like India and China, which have not sided with the West in the war with Ukraine. American officials have argued that they are trying to avoid a sudden contraction of supply, and the resulting spike in gasoline and heating oil prices, as the E.U. embargo takes hold.

Russia has said it will not accept a price cap and has threatened to cut off supplies from countries that comply. Analysts say that Russia has been building a so-called “shadow fleet” of old tankers to handle its oil and avoid the sanctions, but they are skeptical that it can assemble a large enough flotilla. If it can’t, Russia may need to begin closing down wells. But Moscow has managed to keep production much higher than many analysts anticipated in the early days of the war in Ukraine.

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

At the moment the oil markets are betting that these momentous shifts can be handled smoothly. But they may be wrong.

Article source: https://www.nytimes.com/2022/12/04/business/opec-plus-oil-production.html