Oil is one of the strategic commodities in which any change in its production affects the global economy. Last week, OPEC+ decided to roll over the production policy agreed upon in the previous October meeting of decreasing output by 2 mb/d accounting for around 2% of global production as projections of higher demand rise with China’s reopening. According to the International Energy Agency (IEA), Global oil demand is projected to increase by 1.9 mb/d to record 101.7 mb/d.
Oil prices declined at the beginning of the year but have rebounded on hopes that Chinese demand will increase, even though worries about a worldwide recession continue to weigh on prices. After the OPEC+ meeting, the price of Brent crude remained stable at about $85 per barrel (see chart below). The IEA expects the WTI price to have an average of $87.33/b in 2023 from an average of $95.88 in the previous year.
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Figure 1: WTI Source: TradingView
Russia's breakeven oil price before the invasion of Ukraine was $64.47 per barrel. Even though Saudi Arabia's fiscal breakeven oil price of $80.38/b at the time was different, it was still relatively easy for the two top OPEC+ nations to agree on a price that made sense for each of them. However, fighting costs money, and Russia doesn't have many options besides oil profits to pay for the conflict. The fiscal breakeven price for Russian oil has risen to $114/b as conflict-related expenditures have risen and Russia has been subject to price controls and sanctions, while the Saudi breakeven price is marginally lower than it was before to the war.
In response to this pressure, the Russians have insisted that they will not supply crude oil to any clients while adhering to the price cap set by the West. But doing so would require a further reduction in production.
In an effort to combat falling crude prices, OPEC+ has reduced production. Previous reductions were mostly supported by Gulf producers since they could afford to lower their crude production. The most severe cuts were made by Saudi Arabia, Kuwait, the United Arab Emirates, and Iraq despite demands for more output from the Biden administration. Russia has been able to keep up with or even boost production. However, a lot of Russian crudes is stored rather than sold on the open market. A G-7 price restriction and an EU prohibition have isolated Russia from many of its regular markets. According to S&P Global Commodity Insights, the true price cap on crude oil in 2023 may be caused by declining demand.
Global oil consumption may decline as a result of China's uncertain outlook and the projected U.S. and European recession in the first half of 2023.
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