Oil manufacturing cuts on the desk earlier than sanctions in opposition to Russia

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

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OPEC and non-OPEC oil producers could push through deeper oil production cuts on Sunday, energy analysts said, as the influential energy alliance weighs the implications of an upcoming ban on Russian crude exports and a possible price cap on Russian oil.

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

The much-anticipated meeting comes ahead of potentially disruptive sanctions on Russian oil, weaker crude oil demand in China and growing recession fears.

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

“OPEC+ has been rumored to be considering a cut over the past few days due to weak demand, particularly in China. Still, China’s nationwide traffic has not decreased dramatically,” Galimberti said.

Energy market participants remain concerned about European Union sanctions on the Kremlin’s December 5 purchase of crude oil exports at sea, 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 sea crude from December 5, as part of a concerted effort to curb the Kremlin’s war chest following Moscow’s invasion of Ukraine.

However, fears that an outright ban on Russian crude imports could push up oil prices 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 $60 price cap for Russian sea oil.

“The other factor that OPEC needs to consider is indeed the price cap,” Galimberti said. “It’s still up in the air and that’s adding to the uncertainty.”

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

“So Much Uncertainty”

OPEC+ agreed in early October to cut 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 fuel a recovery in crude oil prices. The signal came despite a Wall Street Journal report that a production increase of 500,000 barrels per day is being discussed for Sunday.

OPEC+ agreed in early October to cut 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.

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Earlier this week, RBC Capital Markets’ Helima Croft said there was no expectation of a production boost from the upcoming OPEC+ meeting and a “significant chance” of a deeper production cut.

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

Following the news that Sunday’s meeting will be virtual rather than in-person, Croft said in a research note that OPEC has opted for a “no-drama optic,” which “seems to increase the likelihood of a rollover decision.”

“Regardless of whether the group decides to stay the course or cut lower, we expect key ministers to signal their willingness to meet quickly to address major changes in market conditions unfolding over the coming weeks and months.” could arise,” she said in the note.

Oil prices, which have fallen sharply in recent months, were trading slightly lower ahead of the meeting.

International Brent Crude Oil Futures were trading 0.2% lower in London on Friday morning at $87.78 a barrel, compared to over $123 in early June. US West Texas Intermediate Futuresmeanwhile, fell 0.3% to trade at $80.95 compared to a level of $122 six months ago.

Barring any negative surprises during Sunday’s virtual OPEC+ talks, and assuming a healthy compromise on Russia’s oil price cap before EU sanctions come into effect on Monday, it’s tempting to boldly conclude that the bottom found,” Tamas Varga, an analyst at brokerage PVM Oil Associates, said in a note Thursday.

Varga said oil prices trading below $90 a barrel are “unacceptable” to OPEC and Russia is widely expected to retaliate against those who back the G-7 deal.

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

“High probability” of a production cut

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

“They have to deal with the fact that demand has fallen in China, prices reflect that, and can they accommodate that demand weakness?” Currie said CNBC’s Steve Sedgwick on Tuesday.

“I think there is a high possibility that we will see a cut,” he added.

Analysts at political risk consultancy Eurasia Group said lower oil prices “increase the risk” of a new OPEC+ output cut.

“Ultimately, the decision will depend on how oil prices evolve when OPEC+ meets and how much markets are disrupted by EU sanctions,” analysts at Eurasia Group, led by Raad Alkadiri, said in a Monday statement research note.

If Brent crude futures fall below $80 a barrel for an extended period before the meeting, OPEC+ leaders could push for another production cut to support prices and bring Brent futures back to around $90, according to Eurasia Group – a level “that they seem to be favouring.”