Oil Market Growing Nervous as Dec 5 Embargo Approaches

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Oil prices are very volatile. On Monday they fell more than 5% due to information from the Wall Street Journal, reporting on a discussion among OPEC members about the possibility of raising their offer by 500,000 barrels per day (b/d), citing members of the delegations but without specifying their nationality. Even if the information was denied by Saudi Energy Minister Abdulaziz bin Salman, as well as his Emirati counterpart, prices only recovered a little more than 1% on Tuesday. The price of a barrel of Brent fluctuated around 88.5 dollars. In a month, it is down -2.86% and in a year it is up +9.7%. As for WTI, the US benchmark crude, its price was around 81 dollars. In one year, it increased by +3.9%.

quota debate

If the information of wsj It was an opportunity for Riyadh to remember that the organization was sticking to the decision, taken at its previous meeting, to reduce its quota starting in November by 2 million barrels per day (mb/d), the OPEC+ offer (association between OPEC and 10 other exporting countries, including Russia), shows the desire of certain countries to have an internal debate within the association, often mentioned but always postponed: a review of the official quotas.

In fact, in reality, the actual supply reduction from this month is 1 mb/d, as many countries do not meet their respective quotas, including Russia. However, within OPEC, the United Arab Emirates and Iraq want to increase their production capacities in order to be able to sell more, in particular due to the peak in world demand for oil that is coming in the coming years, with the acceleration of development. of renewable energies. However, such a debate is sensitive in the context of the war in Ukraine and the sanctions imposed on Russia.

Because the White House still intends to isolate Russia, which requires a rapprochement with Saudi Arabia. But the information of wsj it also attests to the declared desire of the White House to promote rapprochement with Saudi Arabia. Thus, last week, the Biden administration indicated that Saudi Crown Prince Mohammed bin Salman had legal immunity in relation to a future trial for the murder of journalist and opponent Jamal Khashoggi in 2018. A change that indicates that now the Biden administration, which initially wanting to isolate the crown prince, he recognizes him as the representative of the Kingdom.

Replenish strategic reserves

An important signal before the next OPEC+ meeting to be held on December 4, on the eve of the application of two measures: the European embargo on all imports of Russian crude oil and the G7 agreement on the imposition of a price cap ( the figure of 60 dollars has been set). mentioned by senior Biden administration officials) for Russian crude exports. Actions that could reduce the world supply of oil in the international market, and cause the price of a barrel to walk again towards 100 dollars.

However, the course is an issue for the White House. To calm gasoline prices before the midterm elections, Joe Biden this year tapped 180 million barrels of the United States’ strategic reserves (SPR), which reached their lowest level since April 1984, below 400 million barrels, or 40% below its previous level. the Russian invasion of Ukraine.

For its part, the International Energy Agency (IEA) pointed out in its latest monthly report that all shares (strategic and commercial) of OECD countries had fallen below 4,000 million barrels, for the first time since 2004. .

A low water level that is not sustainable in the current geopolitical context. To replenish strategic reserves, the White House has devised an auction system to buy barrels forward in 2024 and 2025, but on the condition that prices are between $67 and $75. Unless there is an increase in the world supply of crude oil, this range is difficult to achieve today.

Especially since another current bearish factor could disappear in 2023: that of demand from the world’s largest oil importer, China. For the moment, Beijing is facing a resumption of the Covid-19 epidemic, leading to a reinforcement of prevention measures in application of its Covid-0 policy, which considerably slows down economic activity.

A recovery of Chinese demand in the second quarter of 2023

Nomura analysts said they estimate regions accounting for nearly 20% of the country’s gross domestic product are under some form of lockdown or restrictions, up from 15.6% last week, not far from the April peak during the strict confinement in Shanghai.

Goldman Sachs banking experts have already revised down the Asian giant’s oil demand to 1.2 million barrels per day (mb/d) in the fourth quarter, delaying the rebound in activity in the second quarter of 2023.

For their part, the IEA experts estimate that Chinese demand will fall to 15 mb/d in 2022, compared to 15.4 mbd in 2021, a drop of 2.6%. According to them, it should reach 15.7 mbd in 2023, which would represent an increase of 4.7%, and therefore a factor in the rise in crude oil prices next year.