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Oil production cuts on the table before Russia’s sanctions




OPEC+, a group of 23 oil-producing nations led by Saudi Arabia and Russia, is meeting on Sunday to decide on the next phase of production policy.

Bloomberg | Bloomberg | Getty Images

OPEC and non-OPEC oil producers could impose deeper oil production cuts on Sunday, energy analysts said, as the influential energy alliance weighs the impact of a pending ban on Russia̵[ads1]7;s crude exports and a possible price cap on Russian oil.

OPEC+, a group of 23 oil-producing nations led by Saudi Arabia and Russia, is meeting on Sunday to decide on the next phase of production policy.

The highly anticipated meeting comes ahead of potentially disruptive sanctions against Russian oil, weakening demand for crude in China and growing fears of a recession.

Claudio Galimberti, senior vice president of analysis at energy consultancy Rystad, told CNBC from OPEC’s headquarters in Vienna, Austria, that he believes the group “would be better off staying the course” and rolling over existing production policies.

“There have been rumors that OPEC+ is considering a cut based on weakness in demand, especially in China, in recent days. Still, China’s nationwide traffic has not been reduced dramatically,” Galimberti said.

Oil production cuts on the table before Russia’s sanctions

Energy market players remain wary of EU sanctions against purchases of the Kremlin’s seaborne crude oil exports on December 5, while the prospect of a G-7 price cap on Russian oil is another source of uncertainty.

The 27-nation EU bloc agreed in June to ban purchases of Russian seaborne crude from December 5 as part of a joint effort to limit the Kremlin’s war chest following Moscow’s invasion of Ukraine.

However, concern that an outright ban on Russian crude imports could send oil prices soaring prompted the G-7 to consider a price cap on the amount they will pay for Russian oil.

No formal deal has yet been reached, although Reuters reported on Thursday that EU governments had tentatively agreed to a price cap of $60 a barrel for Russian seaborne oil.

“The other factor OPEC has to consider is actually the price ceiling,” Galimberti said. “It’s still up in the air, and this adds to the uncertainty.”

The Kremlin has previously warned that any attempt to impose a price cap on Russian oil would do more harm than good.

“So much uncertainty”

OPEC+ agreed early on to reduce production by 2 million barrels per day from November. It came despite calls from the US for OPEC+ to pump more to lower fuel prices and help the global economy.

The energy alliance recently hinted that it could impose deeper production cuts to spur a recovery in crude oil prices. That signal came despite a report by The Wall Street Journal that suggested a production increase of 500,000 barrels per day was under discussion on Sunday.

OPEC+ agreed early on to reduce production by 2 million barrels per day from November. It came despite calls from the US for OPEC+ to pump more to lower fuel prices and help the global economy.

Bloomberg | Bloomberg | Getty Images

Speaking earlier this week, Helima Croft of RBC Capital Markets said there was no expectation of an output increase from the upcoming OPEC+ meeting and a “significant chance” of a deeper output cut.

“There’s so much uncertainty,” Croft told CNBC’s “Squawk Box” on Tuesday. OPEC delegates “have to take into account what’s happening with China, but also what’s happening with Russian production.”

“My expectation right now is, if prices flirt with Brent breaking into the 70s, OPEC will certainly make a deeper cut, but the question is how do they factor in what’s coming the next day?” Croft said. “So I think it’s still up for grabs.”

Oil prices, which have fallen sharply in recent months, traded somewhat lower ahead of the meeting.

International Brent oil Futures traded 0.2% lower at $87.78 a barrel on Friday morning in London, down from over $123 in early June. US West Texas Intermediate futuresmeanwhile, fell 0.3% to trade at $80.95, compared with a level of $122 six months ago.

Goldman Sachs' Jeff Currie says OPEC+ is very likely to impose oil production cuts

“Barring any negative surprises during Sunday’s virtual OPEC+ talks and assuming a healthy compromise on Russian oil price caps before EU sanctions start on Monday, it is tempting to boldly conclude that the bottom has been found,” Tamas Varga, analyst at broker PVM Oil Associates, said in a note Thursday.

Varga said oil prices trading below $90 a barrel were “not acceptable” for OPEC and that Russia was widely expected to introduce retaliatory measures against those who signed up to the G-7 deal.

” Choppy and jittery market conditions will prevail, but the new month should bring more joy than November,” he added.

‘High probability’ of an exit cut

Jeff Currie, global head of commodities at Goldman Sachs, said OPEC ministers must discuss whether to accommodate further weakness in demand in China.

“They have to deal with the fact that, hey, demand is down in China, prices reflect that, and do they adjust for that weakness in demand?” Currie told CNBC’s Steve Sedgwick on Tuesday.

“I think it’s very likely we’ll see a cut,” he added.

Analysts at political risk consultancy Eurasia Group said lower oil prices “raise the risk” of another OPEC+ production cut.

“Ultimately, the decision will depend on the trajectory of oil prices when OPEC+ meets and how much disruption is evident in markets due to EU sanctions,” Eurasia Group analysts led by Raad Alkadiri said in a research note on Monday.

If Brent oil futures fall below $80 a barrel for an extended period ahead of the meeting, Eurasia Group said OPEC+ leaders could push for another output cut to boost prices and bring Brent futures back to around $90 – a level “which they seem to favor.”



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