Expect OPEC+ to adopt a 'watch and wait' to see U.S. sanction impact on Russian oil: Helima Croft

Key Concepts

• OPEC+ Production Levels
• Crude Oil Prices
• Voluntary Production Increases
• Spare Production Capacity
• Sanctions on Russian Oil
• Shadow Fleet
• Venezuela Military Buildup
• Major Oil Company Earnings (Chevron, ExxonMobil)
• Oil Demand (China SPR Buying)
• Russian Oil Exports (Rosneft, Lukoil)

OPEC+ Meeting and Production Outlook

OPEC+ members are scheduled to meet on Sunday to discuss production levels. A modest increase in output for December is widely anticipated. The current price of crude oil is approximately $60 per barrel, representing a 16% decrease since the beginning of the year.

Helima Croft, Global Head of Commodity Strategy at RBC Capital Markets and CNBC contributor, expects OPEC+ to announce another voluntary production increase of 137,000 barrels per day for December, similar to recent months. However, she notes that the actual number of barrels entering the market from OPEC+ might be significantly lower, potentially half of the headline figure. This is because most OPEC+ producers have already reached their maximum production capacity. The only significant spare capacity remaining is primarily in Saudi Arabia. Croft questions whether a potential supply reduction of 70,000 to 80,000 barrels from Saudi Arabia, along with some from the UAE, would significantly impact the market.

Key Factors Influencing Market Sentiment

Croft emphasizes the critical importance of monitoring developments on the sanctions front, particularly the US's commitment to enforcing new sanctions on Russian oil producers. Additionally, the military buildup in Venezuela is a significant factor. Given these uncertainties, OPEC+ is likely to adopt a cautious "watch and wait" approach, reluctant to make substantial production adjustments until the enforcement of sanctions and the situation in Venezuela become clearer.

Croft draws a parallel to 2018 when the US withdrew from the Iranian nuclear agreement. At that time, OPEC was asked to increase production, with the US stating Iran would be reduced to zero. OPEC responded with a million-barrel-per-day increase, only for the US to later issue exemptions for Iranian oil importers, leading to a price drop. This historical precedent suggests OPEC will be hesitant to act decisively without clear signals on sanctions enforcement.

Geopolitical Developments and Market Conversations

The G7 Energy Ministerial is currently taking place in Toronto, with a strong focus on Ukraine and efforts to tighten sanctions on Russia, including targeting the "shadow fleet." These discussions are expected to extend to conversations in Abu Dhabi on the sidelines, where the supply picture for the upcoming year will be assessed. The seriousness of US sanctions enforcement and the situation in Venezuela are key points of attention. The significant US military buildup off the coast of Venezuela, ostensibly targeting drug boats, raises questions about a potential regime change operation against the Maduro government.

Major Oil Company Earnings and Price Forecasts

Both major oil companies, Chevron and ExxonMobil, have reported strong earnings. Mike Wirth, CEO of Chevron, indicated that he believes oil prices are likely to decline from current levels, a sentiment shared by many of his contacts.

Divergent Views on Future Oil Prices

There are differing perspectives on the future of oil prices. One group of analysts and producers anticipates an oversupply in the first quarter of next year, citing increased production from countries like Guyana, a significant project for ExxonMobil. Conversely, international oil company executives, such as Amin Nasser of Aramco, speaking at the FI in Saudi Arabia, express optimism about strong demand.

The two major wildcards influencing this outlook are:

1. Chinese Strategic Petroleum Reserve (SPR) Buying: The continuation of Chinese purchases for their SPR at current levels is a significant driver of demand.
2. Sanctions Enforcement Rigor: The seriousness of US enforcement of sanctions on Russian oil is a critical factor. If companies like Reliance are compelled to cease deals with Rosneft, and Turkey is forced to stop importing from Rosneft, it could lead to a substantial supply outage from Russia. This could potentially result in one to one and a half million barrels of Russian oil being unable to find buyers. The ultimate impact will depend on the US's commitment to enforcing these measures.