Redrawing the world oil map;  Russia discount Emgargoed oil

Two of what had threatened to be huge shocks to the oil market in a year of seismic changes for the industry took a back seat on Monday as more inflation data sent oil prices lower. Meanwhile, OPEC+ decided to keep steady its October cut as the European Union launched the latest phase of its embargo on Russian crude.




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On Sunday, the Organization of the Petroleum Exporting Countries and its allies, including Russia, surprised analysts by agreeing to leave oil production targets intact. The group startled markets by announcing a two-million-barrel-a-day cut in early October, predicting a slowdown in global demand.

On Monday, the EU imposed the next step in its ban on Russian oil purchases, forcing the Netherlands, Italy, Bulgaria and Croatia – the last EU buyers of Russian oil – to also go elsewhere for their crude.

“The flows have stopped, but they’ve just been redirected,” said Matt Smith, lead oil analyst for the Americas at Kpler. India collects much of the diverted Russian oil, Smith said, amounting to a fulcrum that redirects global oil trade routes.

Oil markets make moves on Monday

Oil markets rose early on Monday on news that China was weakening further strict zero covid policy. U.S. crude oil then reversed course and fell 3.3% to below $78 a barrel. Brent crude also fell about 3%, holding above $83. The reversal came after data on the US services sector raised concerns that the Federal Reserve may continue to raise interest rates aggressively.

Meanwhile, U.S. natural gas also fell sharply, falling more than 10% on Monday. This was driven by increased supply and expectations of mild weather in the US over the next two weeks. The data also showed that demand for natural gas in Europe also fell 24% in November compared to the five-year average for the month.

Oil Markets: The OPEC+ Decision

The decision by OPEC and its allies on Sunday to maintain their current quota policy appears to signal that the cartel believes it has already made the right call on oil demand when it meets in October. OPEC+ has scheduled its next meeting for June.

Kpler’s Smith said in an interview that this suggests the oil cartel plans to maintain the 2 million bpd cut for the next six months.

Smith said that if crude oil prices start to gravitate back towards $90 a barrel, then the group is “justified to do nothing”.

However, he added that if prices continue to hold around $75-$80 per barrel, OPEC+ may try to reconvene to make further cuts.

“Our belief is that the likely impact of rising interest rates and the ongoing situation with China will just weigh on the market so much that prices will remain anchored in that $80 to $90 region,” Smith said.

Anne-Louise Hittle, head of macro oils at Wood Mackenzie, said on Sunday “given the uncertainty in the market”, the OPEC+ decision was not a surprise.

“The group of manufacturers faces downside risk due to the potential for weakening global economic growth and China’s zero-Covid policy,” Hittle said.

Oil markets: EU embargo and price cap

ING Group analysts Warren Patterson and Eva Manti wrote on Monday that the EU’s decision to cap what Russia receives for its Urals crude “calls into question how effective the cap will be at this time.”

Third Bridge analyst Peter McNally told IBD that neither the EU embargo nor the $60 price cap on Russian crude is likely to dampen sales.

“The cap is important if it drives Russian physical supplies out of the market,” McNally said. Russia already realizes $55-$60 in sales to China and India, according to McNally.

However, he added that if Brent prices hit $100 a barrel, it could spur Russia to withdraw crude oil from the oil market.

“There is one very important consideration in the oil market: inventories are still low,” McNally said. “A physical disruption of supply or a significant increase in demand could result in low to critically low inventories.”

Russia begins to reduce displaced barrels

Russian crude oil prices fell 8% to below $64 on Monday as the embargo deepened. A relatively small amount of oil-related products still moves to some EU countries by rail and pipelines. However, all sales of oil by sea have been suspended. The ban is expected to extend to other Russian petroleum products on February 5.

Pakistan’s minister of state for petroleum confirmed on Monday that Russia has agreed to supply crude oil, gasoline and diesel to Pakistan at a discount, according to news service oilprice.com. China and India have not agreed to the EU price cap. But the EU embargo makes them Russia’s biggest oil customers. Both were already demanding deep discounts, according to oil price.com.

Also, Chinese authorities said on Monday that they would cut the prices of gasoline and diesel by 440 yuan, about $62.51 a ton, and 425 yuan, $61 a ton, respectively, due to the forecast drop in demand. The cuts were to take effect on Tuesday.

It will become clear where that Russian oil is going, Smith said, in the “coming days and weeks.”

EU countries are likely to seek a mix of sources. Flows from the US, Latin America and the Middle East have already increased significantly.

“The EU embargo is unlikely to impact oil markets on its own,” McNally said. “The plan had been telegraphed for months and buyers found alternative sources of supply. This was not an overnight decision that was made immediately.”

Please follow Kit Norton on Twitter @KitNorton for more coverage.

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