Oil prices dipped Friday, but made their first weekly advance since early November, as energy markets braced for an OPEC+ meeting and an embargo of Russian oil. Analysts expect an output cut from OPEC amid a recent pullback in oil prices. Oil markets are unsure what to expect as the European Union prepares to curtail purchase of more than a half-million barrels per day of Russian crude.
The Organization of Petroleum Exporting Countries and its allies, including Russia, are preparing to meet on Dec. 4 to discuss oil production quotas. U.S. crude futures shed 1.3% Friday, falling around $80.2o a barrel. Crude futures were up around 7% for the week, after a three-week slide. On Monday, prices briefly hit 12-month lows amid civil unrest in China as people protested the country's strict zero-Covid policy.
Oil-related stocks have been volatile, despite the rise in oil prices. Energy giants Exxon Mobil and Chevron both traded down about 0.8% during market trading Friday.
Speculation that OPEC+ could decide to go with a production cut has pushed oil prices higher. There is also the specter of the EU's embargo on crude from Russia, poised to begin Dec. 5. Meanwhile, the EU and the Group of Seven nations, known as the G-7, agreed Friday to implement a $60 per barrel price cap on Russian crude sales by that date. The EU and the U.S. look to ratchet up sanctions on Russia in response to the war in Ukraine.
Oil Price Support Tactics At The OPEC+ Meeting
As recently as a week ago, news reports said OPEC was contemplating a 500,000 barrel per day increase to its quota. Multiple sources within OPEC firmly denied those reports.
As of Tuesday, analysts generally expected OPEC+ to keep supply tight or at the very least make that the message going into the meeting. In early October, the oil cartel decided to cut production by 2 million barrels per day in November amid forecasts for weakening demand. Despite White House resistance to those cuts, OPEC's view has been largely borne out. U.S. crude prices are down more than 9% since OPEC+ announced the November cut.
Matt Smith, lead oil analyst for the Americas at Kpler, said in an interview that with crude prices edging lower, it would once again be logical for OPEC+ leaders to consider additional production cuts.
"We should expect them to intervene in the market to lend some support to prices here," Smith said. "Whether that's through rhetoric or through an actual production cut."
Smith said that, internally, Kpler forecasts a possible cut of 500,000 barrels per day.
"Significant enough to lend support to prices. But not so significant that it would cause producers to really change their tactics too much," he said.
OPEC+ decided late Tuesday to meet virtually, instead of in-person. This has led some analysts to suggest there are unlikely to be any changes in production policy.
Goldman Sachs economist Jeff Currie told CNBC Tuesday that there are multiple forces acting on the oil market currently.
Is A Price Cap On Russian Oil Coming?
Currie said China's drop in demand, as a result of Covid restrictions, is "worth more than the OPEC cut for the month of November." Currie also noted Russia's push to get more barrels of crude onto the market, ramping up supply ahead of the Dec. 5 export ban.
Currie stressed China's importance, and that OPEC+ will have to decide whether it accommodates the current weakness in demand.
"I think that there's a high probability we do see a cut," Currie said.
Oil markets are also assessing impact from the EU embargo versus Russian crude, as well as the oil price cap the EU aims to impose on the country.
Until Friday, EU governments had failed to agree on a price cap. The G-7 and the 27-member states of the EU had discussed a cap around $65-$70 per barrel, but some countries believed the cap should be lower.
Poland, Lithuania and Estonia worked to secure a review of the price cap every two months starting in mid-January, the Wall Street Journal reported.
Russia crude oil traded around $66.54 per barrel Friday. Poland and others had advocated the cap should be around $20-$30 a barrel, to make Russia feel more pain.
The goal of the price cap is to cut Russia's oil revenues as punishment for its invasion of Ukraine, while keeping global oil supplies steady. The G-7 and the EU plan to implement the price cap on Dec. 5 along with the embargo on crude from Russia.
However, Smith said that the oil embargo and the price cap on Russia are likely to be "somewhat of a nonevent."
Smith said a price cap around the $60 per barrel mark is too close to the current discounted Russian crude prices.
"Also because (the oil) is already being sent in large volumes to India and to China, who are allies of Russia and are not willing to sabotage that relationship," he said.
Oil Prices: EU Is Already Off Russian Crude
In November, the Netherlands, Italy, Bulgaria and Croatia were the only countries in the EU to import crude from Russia. The four countries imported a total of around 650,000 barrels per day from Russia in November, with the bulk of it imported by Italy, according to Kpler analysis.
In June, the EU banned the purchase, import or transfer of Russian crude oil starting Dec. 5, and other refined petroleum products from Russia starting Feb. 5.
Bulgaria received an exemption and can continue to import crude oil until the end of 2024. It cannot, however, export petroleum products produced in Bulgaria using Russian oil. The country imported 138,000 barrels per day in November. Bulgaria purchased 181,000 barrels per day in October, the highest amount in the last 18 months.
"We have seen the EU-27 already wean itself, to a large extent, from Russian crude," Smith said. "The impact of the sanctions just means that we're going to see incremental barrels being redirected away from EU-27 countries to most likely Asia."
Please follow Kit Norton on Twitter @KitNorton for more coverage.
