Volatility of oil prices will be name of the game in December 2022

The month of December has started and it can be rightly termed the most crucial for the energy market as several events and factors would determine the trend in prices by the end of year 2022 and beyond.

While the Chinese zero-Covid policy and protests against that policy weigh negatively on market sentiment, the OPEC plus meeting on December 04 and the beginning of the European Union embargo on Russian seaborne crude oil imports on the next day are likely to shape the course of the prices. Uncertainty is high, which would stoke further volatility in prices. 

Oil slumped early on Monday to the lowest level in nearly a year – since December 2021, weighed down by risk aversion in commodity markets amid protests in China over the authorities’ strict Covid curbs policy. 

The recent price rout, with Brent plunging by 10% in one week, intensified speculation that OPEC Plus members could consider another production cut when they meet on Sunday, December 4. On the following day, December 5, the EU ban on imports of Russian crude oil and the associated G7-EU price cap begins, with the exact price of the cap yet to be agreed on and announced. 

With so many uncertainties, oil prices are seesawing on every rumor or report. This week and the ones after that will likely see more of the same and prices could swing either way depending on the OPEC Plus meeting, the EU ban and price cap on Russian oil and Russia’s reaction to it, and the developments in China, which, so far, is singlehandedly dragging down oil prices due to fears of weak demand in the world’s top crude oil importer at least in the short term. 

A violent move down in prices began on November 21 after The Wall Street Journal citing OPEC delegates that the members of the group had informally discussed whether there would be a need for more oil on the market in view of the EU embargo on Russian crude oil imports. The report was immediately denied by OPEC’s top producer Saudi Arabia and another influential member of the cartel, the United Arab Emirates (UAE). 

“United Arab Emirates denied that it is engaging in any discussion with other OPEC+ members to change the last agreement, which is valid until the end of 2023,” its Energy Minister Suhail al-Mazrouei said on November 21.

“We remain committed to OPEC Plus aim to balance the oil market and will support any decision to achieve that goal,” the minister added. 

As of November 29, speculation is mounting that OPEC Plus could consider a cut at its December 4 meeting due to gloomier-than-expected oil demand outlook amid Chinese Covid curbs and protests and slowing economies elsewhere. 

Considering that oil prices slumped to the lowest level since December 2021, OPEC Plus could indeed decide to defend an US$80 floor under prices, but it will have a difficult task in predicting how the embargo on Russian crude will impact trade flows and prices. 

The structure of the oil futures market is showing sign of sluggish global oil demand and sufficient supply just ahead of the embargo on Russian oil. Weakening physical demand and plunging spot premiums for Middle Eastern crude could prompt OPEC Plus to announce a fresh cut on Sunday. 

The alliance of OPEC and non-OPEC producers led by Russia regularly denies it’s defending a certain oil price, but it always says that it looks at the market fundamentals.

These days, the physical market is showing signs of weakness and even an oversupply in the short term, considering the contango in both WTI and Brent front-month to second-month futures. 

Iraq, OPEC’s second-largest producer, signaled this weekend that the OPEC+ meeting would focus on the current market conditions and balances.  

Several hours after the OPEC+ meeting, the EU embargo and the price cap on Russian oil enter into force. There are so many uncertainties surrounding the measures that analysts cannot predict anything but further volatility in oil prices. The uncertainties range from the exact price of the cap – with the EU still at odds over this five days before the embargo kicks in – to how many vessels Russia would need to place its oil to willing buyers, where ship-to-ship transfers can occur for Baltic exports bound for Asia, how big the ‘dark fleet’ under the radar could be, and last but not least, whether Putin will go through with his promise to stop supplying oil to anyone joining the price cap. 

“All of these things are so significant to the oil markets that they could whip prices from one direction to the other very significantly,” Michael Haigh, Global Head of Commodities Research & Strategy Societe Generale, told The Wall Street Journal.