OPEC+ decision on oil quotas muddled by Russian sanctions

OPEC and its Russia-led allies are set to meet Dec. 4 to review their production quotas, on the eve of the EU crackdown on Russian crude supplies and the G7's attempt to impose a price cap.

The punitive measures figure to scramble crude flows, but with the exact fallout still unknown amid a murky market outlook, the oil producer alliance appears likely to maintain its output cuts, though delegates say a further reduction of quotas cannot entirely be ruled out.

Meanwhile, China is a sleeping tiger of oil demand, if its zero-COVID policies are eased, an uncertain prospect as the government cracks down on widespread protestors.

Delegates say the high odds of a global recession are still top of mind for many ministers. Indeed, OPEC kingpin Saudi Arabia's state oil company Aramco is expected to lower its January official selling prices for Asia-bound cargoes after the meeting, reflecting bearish demand, according to traders polled by S&P Global Commodity Insights.

The OPEC+ group cancelled plans to gather in-person in Vienna, and instead will hold the meeting online.

"OPEC+ will adopt a cautious position while waiting for more visibility and will make a decision based on concrete elements," one delegate said, adding that keeping the current quotas in place for now is likely the path of least resistance.

Another delegate said: "I think rollover, but you know, anything could happen."

The OPEC+ alliance agreed Oct. 5, in its first in-person meeting since March 2020, to slash output quotas by 2 million b/d from November, drawing fire from the US, which had lobbied for more supplies.

Benchmark Dated Brent crude prices have see-sawed since then, breaching $101/b at one point, but falling into the low $80s/b, as well.

Platts assessed Dated Brent at $89.09/b on Dec. 1, according to data from S&P Global Commodity Insights.

"A cut would not be a major surprise, given our expectation of stock builds through April, but a recent rebound in Brent prices may have lowered the urgency for now," S&P Global Commodity Insights analysts Nareeka Ahir and Paul Sheldon said in a note.

OPEC's 13 members are scheduled to convene on Dec. 3, in what should be a mostly administrative meeting to deal with budgets and other non-market matters.

Then a nine-country ministerial monitoring committee, co-chaired by Saudi Arabia and Russia, is set to meet at noon Vienna time (1100 GMT) on Dec. 4, to review oil market forecasts and begin discussing policy, before the full OPEC+ conference assembles at 1 pm Vienna time (1200 GMT).

Whatever the group announces, the decision will be reviewed at the next monitoring committee meeting scheduled for February.

Russian test

A major area of uncertainty going into 2023 is the impact of new sanctions on oil production in Russia – the largest non-OPEC producer in the group.

The G7's planned price cap for Russian crude also looms but has yet to be finalized, though sources have said it is likely to be at $60/b.

Analysts expect the measures, alongside the EU's upcoming ban on Russian refined products imports from Feb. 5, to cause significant disruptions to oil flows out of the country.

S&P Global Commodity Insights forecasts an initial dislocation of 1.1 million b/d between November and February, taking them to 1.5 million b/d below pre-conflict levels.

Paris-based Eurasia analyst George Voloshin said that Russia will struggle to redirect a significant chunk of its oil and oil products exports away from Europe when the bans come into force, and output will therefore decline by around 1.5 million b/d within the first 3 to 6 months of 2023.

Russian crude oil output was 9.85 million b/d in October according to the latest Platts survey by S&P Global Commodity Insights of OPEC+ production. This is below pre-war levels, with Russia producing 10.11 million b/d in February. The biggest drop in Russian crude output so far this year came in April, when it fell to 9.14 million b/d.

To date, OPEC+ leaders have been keen to keep Moscow within the bloc's fold, but a cratering of Russian oil flows could affect the group's dynamics.

"Russia's strategic standing within OPEC+ can only shrink if Russia has to shut down a material percentage of its current oil production," Voloshin said.

Russia's key crude grade Urals is already trading at a major discount. Platts assessed Urals at $59.64/b Dec. 1 – almost $30/b below Dated Brent, according to data from S&P Global. Prior to the invasion Urals was trading at a discount of around $10/b to Dated Brent.

Russia has budgeted for an average Urals price of $70/b in 2023 and $65/b in 2024, so a price cap at $60/b would only have a modestly negative impact on the Russian economy if volumes hold up, said Chris Weafer, founding partner of consultancy Macro-Advisory.

How long Russia can withstand any strain will be key to how the OPEC+ manages the oil market.