OPEC+ mulls production cut as Ukraine invasion, demand worries hit group economies


OPEC+ meets Oct. 5 to consider a significant production cut, as the Russian invasion of Ukraine and demand issues increase state budget demands for coalition members.

This has especially affected the group’s largest non-OPEC producer, Russia, with Western sanctions compounding the problems facing the group as a whole.
Prior to the February invasion, Russia’s economic position in OPEC+ was considered relatively strong, which enabled it to secure favorable terms in previous negotiations.

It is unclear whether Russia will send a delegation to Vienna this week to attend the group’s first in-person meetings since early 2020. The OPEC+ JTC will meet on October 4 to assess market conditions, followed by the JMMC and the 5 October ministerial meetings.

Discussions will take place as Russia now grapples with months of trading its key quality Urals crude at steep discounts.

The latest Platts valuation of the Urals was $64.07/bbl on September 30, according to S&P Global Commodity Insights. This compares to Dated Brent at $87.92. Since the start of the invasion, discounts have reached $40/bbl. Prior to the invasion, Urals were trading at a discount of around $10/bbl to dated Brent.

Russia currently forecasts a further decline in the price of oil from the Urals over the next three years – to $70.1/bbl in 2023, $67.5/bbl in 2024 and $65/bbl in 2025. Its forecast for 2022 is $80/bbl.

G7 plans for a price cap on Russian oil purchases could further worsen the situation by the end of the year. There should also be a significant reduction in Russia’s export options by early 2023, when new EU sanctions on oil imports and marine insurance come into effect.

The rebates combine with large military spending to push up estimates of Russia’s break-even oil price in 2022.

Paris-based Eurasia analyst George Voloshin said it was difficult to estimate the price of oil Russia would need to balance the budget.

“$120 a barrel as the global Brent price would probably do, but such a price is currently unobtainable as recession fears hang over everything,” Voloshin said.

Government spending costs resulting from the covid pandemic as well as rising inflation around the world are pushing up fiscal break-even estimates for some other OPEC+ producers, but not to the same extent as in Russia .

The high exchange rate of the ruble against the dollar also has an impact on Russia’s finances.

“The super strong ruble is a major aggravating factor: the Russian budget receives considerably less tax revenue while the ruble is so strong. Without the invasion and the ruble trading at an average of 75 to 1 USD, 2022 would have been an exceptional year for the Russian oil and gas industry,” Voloshin said.

During previous periods of price volatility, Russia devalued the ruble to support energy producers, whose costs are mainly in rubles and revenues are mainly in US dollars. The fiscal rule also allowed Russia to direct oil revenues above a set price to a sovereign wealth fund to protect against future price shocks. Western sanctions prevented Russia from buying dollars to manage the exchange rate.

This makes Russia more likely to push for deeper production quota cuts within OPEC+ to support prices. S&P Global Commodity Insights currently forecasts a reduction of 1m bpd for November, and an additional 2m bpd once the current deal is extended to 2023.

“Russia is pushing to hit 1 million barrels a day next week, though U.S. pressure ahead of the Nov. 8 election may cause others to balk,” S&P Global said in a political risk dashboard. published on September 30.

Despite these risks and a recent drop in world oil prices, the country continues to receive significant oil revenues. The IEA estimates that Russia earned $17.7 billion in August, down from $1.2 billion in July and the lowest level since March.

Additionally, Russian President Vladimir Putin has said that Russia would respond to a price cap by suspending deliveries to countries where it is implemented, which could drive up global oil prices.
Source: Platts

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