Tag: Russia

Has Saudi Arabia Become Europe’s Secret Santa?

Posted on by phoffman@channelchek.com
Image Credit: Gunter Henschel (Flickr)

Europe May Be Saved from the December Planned Oil Embargo in a Nick of Time

On December 5, the European Union plans to cap oil prices at levels where EU nations would then be permitted to buy oil from Russia. This would significantly reduce the petroleum supply of the region going into winter. The day before this goes into effect, (December 4), OPEC+ will meet to set output levels. Saudi Arabia and other OPEC producers are expected to discuss an output increase, according to emissaries from the group. The 11th hour move could keep much needed petroleum flowing into the region at a time that weather-related demand would naturally grow, holiday driving would be expected to increase, and war-related strategies would have reduced oil coming out of Russia. While western news has verified their sources as actual delegates of OPEC+, the Saudi’s are now saying that their plans are always secret.  

About the New Expectations

A production increase of up to 500,000 barrels a day is now expected to be the discussion at OPEC+’s December 4 meeting, delegates said. Any output increase would mark a partial reversal of a controversial decision last month to cut production by 2 million barrels a day. This was agreed upon at the most recent meeting of the Organization of the Petroleum Exporting Countries and their Russia-led allies, a group known collectively as OPEC+.

The White House had said the production cut undermined global efforts to negatively impact Russia’s war in Ukraine. Saudi-U.S. relations have hit a low point over oil-production disagreements this year; if the December 4 OPEC+ meeting leads to increased oil, this may warm the cooled Saudi-U.S. relations.  

About the EU December 5th Plan

The European Union has agreed to stop all oil imports from Russia on December 5. The plan is to cap the prices at which EU nations would buy oil from Russia, that price is expected to be near $60 per barrel. Russia has reacted by increasing exports to Asia, but the price cap is expected to reduce its exports and lower total supply by up to one million barrels per day.

About the OPEC+ December 4th Expectations

A production increase of up to 500,000 barrels a day is now under discussion for OPEC+’s December 4 meeting, emissaries said.

Any increase in OPEC+ output will partially undo the decision made at OPEC+’s its last monthly meeting. In October the cartel voted to cut production by 2 million barrels per day. The decision by the Organization of the Petroleum Exporting Countries and their Russia-led allies, (OPEC+) was a disappointment to the White House and NATO nations that saw reduced production as strengthening Russia’s ability to fund its war with higher priced exports.  

Under normal production discussions by OPEC+ production increases, with oil prices falling more than 10% since the first week of November, one might not expect an increase. Brent crude traded at about $87 a barrel on Monday, while WTI, the U.S. benchmark, fell below $80 a barrel for the first time since September. Production increases could cause prices to fall further.  

Emissaries say, a production increase would be to respond to expectations that oil consumption will rise in the winter. Oil demand is expected to increase by 1.69 million barrels a day to 101.3 million barrels a day in the first quarter next year, compared with the average level in 2022.

OPEC and its allies say they have been carefully studying the G-7 plans to impose a price cap on Russian oil, conceding privately that they see any such move by crude consumers to control the market as a threat. Russia has said it wouldn’t sell oil to any country participating in the price cap, potentially resulting in another effective production cut from Moscow—one of the world’s top three oil producers.

Source: Koyfin

What Else?

Raising oil production ahead of the December 5 EU embargo would give the Saudis another argument that they are acting in their own interests, and not is support of Russia’s.

Talk of the production increase emerged after the Biden administration told a federal court judge that Saudi Crown Prince Mohammed bin Salman should have sovereign immunity from a U.S. federal lawsuit related to the killing of Saudi journalist Jamal Khashoggi. The immunity decision is seen by some as a concession to Prince Mohammed, and heighten his standing as the kingdom’s de facto ruler. The move comes after the Biden administration tried for months to isolate him.

Another factor that helps account for the timing of OPEC+’s discussion to raise output is the two large OPEC members, Iraq and the United Arab Emirates that want to pump more oil. Both countries are pushing the oil-producing nations to allow them a higher daily-production ceiling, which would lead to more oil produced globally.

Saudi officials late Monday denied reports the kingdom is reversing course and helping the West with added production.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.wsj.com/articles/saudi-arabia-eyes-opec-production-increase-ahead-of-embargo-price-cap-on-russian-oil-11669040336

https://finance.yahoo.com/news/oil-sinks-china-struggle-covid-024416236.html

https://www.reuters.com/business/energy/saudi-arabia-eyes-opec-production-increase-wsj-2022-11-21/

Oil Market Drivers Attract Historic Bullish Positions

Posted on by phoffman@channelchek.com
Image Credit: Kurayba (Flickr)

Factors Still Point to Higher Oil Prices and Sizeable Bets on Crude

There are many factors impacting why traditional energy prices and producers may have a hurricane-force tailwind heading into the holidays and next year.

A boost in demand for oil is expected as China just announced that it is lowering its quarantine requirements for visitors from outside the country. But Chinese Covid policies aren’t the only impetus pushing up oil demand – around the globe, there are supply challenges that are playing out. Oil hasn’t risen above $100 a barrel since early Summer, some traders are speculating it will rise above $200 in the coming months. Here’s why.

China

In addition to the announcement that the CPR was cutting the required quarantine period for the country (to five days from seven, with three days of home isolation), the required PCR test hurdle is being lowered as well. And airlines no longer run the risk of being suspended if the travelers they bring in that test positive is five or more.

Europe

The European Union has agreed to stop all oil imports from Russia on Dec. 5. The plan is to cap the prices at which EU nations would buy oil from Russia, that price is expected to be near $60 per barrel. Russia has reacted by increasing exports to Asia, but the price cap is expected to reduce its exports and lower total supply by up to one million barrels per day.

United States

Back in May, the U.S. took the drastic step of increasing available supply by selling oil from the U.S. Strategic Petroleum Reserve at a rate of nearly one million barrels per day starting in May. The increased supply has kept oil prices down. But the sales are unsustainable and expected to be reduced. Congress has allowed another sale of 26 million barrels that are expected to carry through to October 2023. This is a much slower pace of oil releases from the reserves. Plus, the reserves will need to be replenished.

After the Congressionally approved release, the reserve will be down to 348 million barrels, this is half the quantity compared to January of this year —the lowest since 1983. Congress has said that the reserve must stay above 252.4 million barrels, and the incoming Congress is expected to be more conservative when it comes to using these strategic assets to control prices.

Production growth overall in the U.S. has stalled after having increased through most of the year. Government data show that U.S. production dropped to 11.9 million barrels per day last week, this is tied for the lowest level in several months. Supplies of products such as diesel and heating oil in the U.S. are at multiyear lows. So there is not abundant supply should a weather-related or some other fuel-demanding crisis surface.

Source: Koyfin

Prices

Oil is now trading between $92 and $93 a barrel. It had reached a high above $130 in March, shortly after the war began, and hasn’t seen the $100 a barrel level since late June.

Trading this week showed significant flows into an options contract that speculates that $200 per barrel may be in store. The most actively traded Brent crude options contract on Thursday was an option to buy Brent at $200 in March 2023. This was the most active oil contract of the day.

How significant is this bullish activity surrounding oil prices? The ratio of bullish to bearish bets in the options market is wider than at any time in recorded history, according to Bloomberg. Oil options traders are positioned more aggressively than ever before.

Take Away

Oil demand could rise soon in China as travel restrictions are lessened. Elsewhere in the world, oil demand is expected to increase as supplies remain the same or decrease. Demand remained elevated globally despite slower economies.

With supply likely to drop and demand ramping up, $200 by the third week in March is one price expectation for a record number of trades transacted at recently. More than doubling in a few months sounds unthinkable, but the massive trades were transacted by experienced institutional traders.

Paul Hoffman

Managing Editor, Channelchek

The Next Few Months for Oil May be the Most Volatile Yet

Posted on by phoffman@channelchek.com
Image Credit: JoeCabby2011 (Flickr)

How the U.S. and its Allies Plan to Put the Squeeze on Russian Oil Profits

Volatility in oil prices this week has been extreme, even by the standards already set this decade. The price of WTI rose nearly 5% just today. The month ahead promises to create even more volatility as Saudi Arabia just cut prices to Asia; meanwhile, the US and its allies have agreed to put a cap on Russian oil. Details on many of these influences have not yet been worked out or announced. What is known is that the price cap and other sanctions against Russia begin in one month. The commodity trading days leading to the planned December 5 start date and the weeks that follow ought to create a great deal of speculation and price movement. Here is what we do know the allies have agreed upon.

The Cap Map

Sales of Russian oil to the participating countries will be subject to a price cap. The cap pertains to the initial purchase of a load of seaborne Russian oil. The agreement settled by the US and its allies doesn’t subject any subsequent sale of crude as falling under the same cap. The cost of transporting Russian oil is not included in the calculation of the cap. However, these rules only apply once the load of oil makes land. Out at sea, the rules are different.

Source: Koyfin

Trades of Russian oil that occur once the load is at sea are expected to still fall under the cap. However, if the Russia-originated oil has been refined into products such as diesel or gasoline, then it is not subject to the cap.

Restrictions and Jurisdictions

Under the expected price-cap plan, the Group of Seven and Australia are planning to restrict firms in their countries from providing insurance and other key maritime services for any Russian oil shipment unless the oil is sold below a set price. Because much of the world’s maritime services are based in G-7 countries and the European Union, the Western partners are aiming to effectively dictate the price at which Russia can sell some of its oil on global markets.

The Precise Price

The US and its allies have yet to set the price for the scheme, but they expect to define the level or range well before the December 5 implementation date. The slow pace of finalizing the plan have left some oil-market participants concerned that shipments of Russian oil at sea on December 5 could face the cap restrictions. The US Treasury Department, earlier this week, has clarified how this would be determined. The agreement rules that Russian oil shipped before December 5 would be exempt from the cap if it is unloaded at its destination by January 19.

It’s expected the price cap would not bring a crushing blow to banks, insurers, shippers, and traders that help make Russian oil available on global markets. The goal is to cut into the profits Russia earns from its oil sales, the hope by participants is to keep global markets supplied with Russian oil and keep energy prices steady.

The precise price is unknown, however a price range in the mid-60s has been discussed as the possible cap range, as it represents levels in line with where Russian oil had traded before the big run-up.

What Else?

Officials speaking for Russia have threatened to cut their oil production in retaliation for any price cap. It remains seen whether this game of each party partaking in ugly medicine for the survival of both will play out in unexpected ways.  

The plan for the price cap for Russian crude will go into effect on December 5, while two separate price limits for refined Russian petroleum products will kick in on February 5.

Expect volatility in oil prices, leading up to and after the caps go into effect. At the same time, expect the unexpected as it relates to energy.

Paul Hoffman

Managing Editor, Channelchek

https://oilprice.com/Latest-Energy-News/World-News/The-G7-Will-Set-A-Fixed-Price-On-Russian-Oil.html

https://oilprice.com/Latest-Energy-News/World-News/Saudi-Arabia-Cuts-Oil-Prices-For-Asia.html

https://www.wsj.com/articles/u-s-allies-set-parameters-for-price-cap-on-russian-oil-11667554203?mod=Searchresults_pos1&page=1

https://oilprice.com/Energy/Energy-General/Oil-Prices-Rise-As-Bullish-Sentiment-Builds.html

https://www.aa.com.tr/en/energy/oil/oil-prices-show-over-3-rise-in-week-ending-nov-4/36809