Ramifications Of OPEC Meeting And EU Sanctions On Oil

Oil prices continue to rise for the sixth month in a row to increase people's suffering from the rise in the prices of all goods and services and increase pressure on every government. Oil prices have soared more than 50% this year. WTI is trading around 118 dollars per barrel and Brent is trading around 124 dollars per barrel.

Oil prices jumped after EU leaders reached an agreement last week to ban 90% of Russian crude by the end of the year. The embargo is part of the European Union’s sixth sanctions package on Russia since it invaded Ukraine. The EU plans to ban Russian oil imports arriving by sea by the end of this year. This would cut EU nations' oil imports from Russia by two-thirds. Germany and Poland which also import Russian oil by pipeline say they will stop doing so by the end of this year. meaning a total of 90% of Russian oil will be blocked. The EU will continue to allow 800,000 bpd of oil imports brought in by pipeline, as a "temporary measure". That's because countries like Hungary and Slovakia depend on it. Russia has been supplying about a quarter of the oil EU countries import. That is about 2.2 million barrels per day of crude oil and 1.2 million barrels of oil products. The European Union has not announced any plan to provide alternatives to Russian oil so far and the plan is expected to be clear in the coming days, leaving the oil markets in a state of great uncertainty, which may appear significantly in the rise in prices. The below graph shows the main European oil exporters.


the bloc will likely continue to buy some oil from Russia, but it has been shopping around for alternate suppliers. According to Kpler data, imports of crude from Angola have tripled since the start of the war, while Brazilian and Iraqi volumes have risen by 50% and 40% respectively.

"Countries in Asia might buy up to one million barrels per day more crude oil from Russia than they are taking now," says David Fyfe, chief economist with energy data firm Argus Media. "As a result of all the sanctions announced so far, Russia may lose between one-third and up to half of its total oil revenues, but not all of them."

India is getting about 600,000 barrels a day from Russia, up from 90,000 a day last year, when Russia was a relatively minor supplier, It is now India’s second-biggest supplier after Iraq. China could also further ramp up imports of oil from Russia, whose benchmark Urals crude grade is trading at a discount of $34 a barrel to Brent. Vortexa estimates that China imported 1.1 million barrels per day of Russian seaborne oil in May, up about 37% from last year's average.

Last week OPEC+ agreed to production hikes of 648,000 barrels a day for July and August, about 50% bigger than those seen in recent months, despite this unexpected increase oil prices rose after the announcement. There were doubts about the group’s ability to fully deliver the increases, given they will be spread across its members, many of whom have struggled to raise output. The cartel’s output increase will be divided proportionally between members in the usual way. This means that countries that have been unable to raise production, such as Angola, Nigeria, and most recently Russia, would still be allocated a higher quota. This could lead to the actual supply boost being smaller than the official figure, as has often been the case in recent months. The decision by OPEC+ could, in practice, mean 132,000 barrels a day each month of actual additional output from Saudi Arabia, the United Arab Emirates, Kuwait, and Iraq, Citi analysts Eric Lee and Francesco Martoccia said in a note. Most of the world’s effective spare capacity is concentrated in Saudi Arabia and the United Arab Emirates. Together they hold roughly 3 mb/d of spare capacity, but that is not all immediately available. Outside of OPEC+, the United States looks set to add 1.4 mb/d this year. The table below shows the supply of the oil producer countries and their spare capacity.



Most of the world’s adequate spare capacity is concentrated in Saudi Arabia and the United Arab Emirates. Together they hold roughly 3 mb/d of spare capacity, but that is not all immediately available. Outside of OPEC+, the United States looks set to add 1.4 mb/d this year.

As restrictions in China ease, summer driving picks up and jet fuel continues to recover, world oil demand is set to rise by 3.6 mb/d from an April low through August. The oil market is steeply backwardated, a bullish pattern marked by near-term prices trading at a premium to longer-dated ones. Brent’s prompt spread -- the difference between its two nearest contracts was $4.07 a barrel Monday, up from $1.34 a barrel three weeks ago.

Matt Smith, a lead oil analyst for the Americas at Kpler, an analytics company, told CNN Business that "triple-digit oil prices" are likely to stick around. "If Chinese demand comes roaring back after lockdowns and Russia continues to see production drop, then a retest of the high of $139 seen earlier in the year is not beyond the realms of possibility," he said.


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