finished Oil prices The week’s dealings on Friday are down, the lowest in 2022, despite the start of a ban European Union Importing Russian oil and imposing a G7 price ceiling on sales Moscow of oil. In light of those unprecedented sanctions on Russian crude oil and the decision of the “OPEC +” coalition to reduce production by two million barrels per day, starting from the beginning of November (November), prices were supposed to rise, but what happened is that they began to decline.
Within hours of the European oil embargo and the implementation of a price cap on Russian sales, oil tankers were jammed in the Bosphorus Strait. However, the market was not short of supplies and prices were falling. The price of oil futures contracts closed at the end of the week’s trading at $76.15 for the benchmark “Brent” crude, and the price of US light crude (West Texas Blend) at $71.46 a barrel.
Reasons for decline
In a lengthy analysis of the “Financial Times” newspaper published on Saturday, it indicated that these unprecedented sanctions on Russian oil, especially the European import ban, aimed at forcing Moscow to reduce its exports, which it cannot transfer to other buyers, specifically in Asia. However, Russian exports did not actually decrease much, as figures from shipping outlets and tanker tracking centers indicate that Russia’s exports have not yet declined by only regarding half a million barrels per day, from 8 million barrels per day to approximately 7.6 million barrels per day.
“Russian oil supplies remain at their high levels as they have been throughout the year,” says Florian Teller, head of the “Opel X” company that follows the global oil movement, and adds that “any decrease in production will not appear until the end of the first quarter of next year 2023.”
In addition, imposing a price ceiling of $60 a barrel may not mean a significant reduction in Russia’s revenues from its oil sales, according to the main goal of the sanctions, which is depriving it of sources of income that finance its war in Ukraine. By the end of the week’s trading, Urals crude, the main export blend from Russia, was sold in futures contracts at $53 a barrel, less than the price ceiling already imposed.
Although Moscow’s initial reaction was to repeat what it announced before that it would not export its oil to any buyer who applies the price cap, there is no evidence of this happening so far. And Russian President Vladimir Putin said, on Friday, that the price ceiling is less than the current price of Russian oil, and he added, “We will not suffer any losses under any circumstances,” which means that Russia may deliberately destabilize the market, according to his indication that it may reduce its production and exports “if it needs.” necessary” for that.
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It is noteworthy that the initial proposal put forward by the Europeans on the issue of the price ceiling was to impose sanctions on any carrier of Russian oil that does not abide by the ceiling absolutely, but the Americans requested that this be mitigated to become the penalty for a period of 90 days only, for those who provide tankers or insurance services for shipments of Russian crude oil that do not adhere to the price ceiling.
The goal of the Biden administration is to ensure that Russian oil continues to flow to the market so that supply does not decrease and prices rise. If the Western countries want to punish Russia, then it is not useful for them to punish themselves with higher prices, and thus inflation rates, at a time when Moscow may benefit from higher prices.
OPEC + decision
When the “OPEC +” coalition decided in October to reduce the production ceiling by two million barrels per day, the US administration revolted and accused OPEC of “aligning itself with Russia” in a global energy war. The International Energy Organization also accused OPEC of endangering the global economy.
However, despite the criticism and accusations, “the past five weeks have proven that the decision of OPEC + was very wise,” according to the “Financial Times” expression. What happened was that prices fell and did not rise, “which reinforced what the Saudi Energy Minister, Prince Abdulaziz bin Salman, said that cuts are necessary.” As a pre-measure in the face of the weakness of the global economy,” the newspaper confirmed that this maintained the balance and stability of the market.
Although the “OPEC +” decision was to reduce the production ceiling by two million barrels per day, the practical reduction in supply was only within the limits of one million barrels per day, according to oil market analysts. A number of OPEC member countries are already producing below their production quota, such as Angola and Nigeria, due to production problems.
The market is now no longer worried regarding a lack of supply as much as it is concerned regarding lower demand for energy with the global economy expected to enter recession next year. David Solomon, CEO of Goldman Sachs investment bank, says, “Whenever I talk to clients, I notice extreme caution in their directions. Many company heads monitor data and numbers and wait for what can happen.”
One of the clear evidences in the market of this shift due to fears of declining demand is that the spot price of oil is no longer higher than the selling price in futures contracts as usual, and this means that the market estimates that supply will exceed demand next year, which puts downward pressure on prices.
According to data from the International Energy Agency, Chinese oil demand this year witnessed its first contraction since the beginning of the 21st century. Nor has fuel demand in the United States increased at the traditional annual growth rate. This is a strong indicator from the two largest economies in the world to the possibility of lower demand for oil next year.
