OPEC+ production cuts will increase the risk of a sharp rise in oil prices

MOSCOW, 4 Oct — PRIME. This week’s OPEC+ alliance meeting comes against a bleak backdrop as a global economic slowdown has pushed oil prices down despite continued supply uncertainty. The expected production cut by OPEC+, combined with other factors, could trigger a sharp increase in oil prices.

Prices could return to $100 a barrel even as the economy slows down. On Monday, Brent oil prices rose to almost $89 a barrel. Oil stocks also rose, with shares in the SPDR S&P Oil & Gas Exploration & Production exchange-traded fund jumping 6.5%.

In parallel with the fighting in Ukraine, a war is also unfolding in the oil market. OPEC makes decisions on oil production jointly with Russia, and this means that OPEC + meetings are becoming more politicized than usual. Amid this uncertainty, traders stepped aside, which caused the volume of trading in the oil market to decrease. Low liquidity could lead to increased volatility in the coming weeks.

OPEC+ is expected to cut production by at least 1 million barrels per day, equivalent to about 1% of global supply. This decision is not made in a vacuum. In the coming weeks, the supply of oil may decrease even more.

The EU ban on offshore deliveries of Russian oil comes into force on 5 December. Approximately 90% of all Russian oil imported into the EU is shipped by sea. Before the conflict in Ukraine, offshore oil supplies from Russia to Europe reached 1.5 million barrels per day, but since then, according to RBC Capital Markets, this volume has fallen below 1 million barrels per day. However, Russian oil exports remain relatively stable as Moscow was able to divert some supplies to Asia. European leaders are developing a plan that could affect these supplies to Asia, including a ban on insurance for tankers carrying Russian oil. In addition, a mechanism is being developed to limit prices for Russian export oil.

Russian President Vladimir Putin can act proactively or even deliberately disable infrastructure facilities, said Helima Croft, head of the strategic division at RBC. The expert suspects that it is Moscow that is behind the explosions and leaks on the Nord Stream gas pipeline. “We believe that the threat of further disruptions deliberately created by Russia with the supply of energy carriers remains at level 3 on the DEFCON scale. It is possible that Putin is preparing to cut off oil supplies to Europe before December 5,” Croft said.

Russia says the US has more reason to blow up pipelines.

Meanwhile, the program to curb the rise in oil prices is coming to an end. The US and other oil importers are releasing some of their strategic oil reserves, totaling more than 1 million barrels a day. The program will end in October, and in November the US may release up to 10 million barrels additionally.

This factor, as well as a potential cut in OPEC+ production, could lead to a serious shortage of supply in the oil market. A global slowdown may not be enough to cap demand and keep prices low, Croft warns.

However, whether the alliance decides on a major cut or not, “the energy market could be at the cusp of a difficult phase. We advise market participants to keep a close eye on the situation,” Croft added.