Oil Dynamics, Russia and OPEC

Russia energy embargo and Brent oil… After Russia’s invasion of Ukraine in February, oil prices skyrocketed with fears that the war might narrow supply, making it harder for Russia, one of the world’s largest oil producers, to produce and export oil.

Russia’s energy conflict with the EU continues. While the EU is preparing to impose an embargo on oil shipments by sea, Russia is preparing to cut exports to countries and companies that do not want to pay rubles. This situation in energy supply increases the possibility of recession in the EU. The ruble stabilized and the Central Bank of Russia largely reversed the rate hikes it had imposed and imposed sanctions at the beginning of the war.

OPEC production… Some OPEC members expressed the idea of ​​suspending Russia’s obligations under the OPEC+ production agreement. Some of the OPEC+ countries that will negotiate the production deal on Thursday point out that Russia may produce less oil due to the sanctions. Russia’s suspension of its treaty obligations may cause Saudi Arabia to produce more oil.

The OPEC meeting decisions that will be announced tomorrow will be important. OPEC+ is expected to increase supply by 430K barrels per day for July. A possible increase in OPEC production will be critical to contain this price effect while oil has entered a series of uptrends for several months due to the war. It is known that the strategic reserve move of the Biden administration will not close the deficit from Russia.

Brent oil price and OPEC production comparison.. Source: Bloomberg

Conclusion? The United States forced OPEC and other major oil-producing states to reduce rising prices by increasing production. The OPEC+ alliance later agreed to gradually raise its daily production targets, but did not respond to the Russian invasion with a massive boost. OPEC+ is expected to stick to its plan to modestly increase production targets each month regardless of Russia’s production problems. If OPEC suspends Russia, along with other major oil producing states, from monthly production targets set by the group, OPEC members—including Saudi Arabia and other states—could increase their own oil production to compensate for Russia.

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