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.
