Column: OPEC+ sits sensibly on its hands as oil uncertainties abound

An OPEC flag is seen on the day of OPEC+ meeting in Vienna in Vienna, Austria October 5, 2022. REUTERS/Lisa Leutner

LAUNCESTON, Australia, Dec 5 (Reuters) - When faced with a myriad of uncertainties the most sensible path is often to sit back and see how events unfold. That is what OPEC+ has chosen to do with the crude oil market.

The Organization of the Petroleum Exporting Countries and allies including Russia did what was expected at their meeting on Sunday, sticking to their previous crude output target.

The group's next scheduled meeting is a monitoring committee gathering on Feb. 1, which means that barring some extraordinary developments the current production target will remain steady for some months.

There are several factors currently creating uncertainty in global crude oil markets, and some are likely to push and pull prices in opposing directions.

These factors include:

- The impact on supply of the price cap imposed on Russian crude exports by the Group of Seven plus Australia, as well as the European Union's ban on imports of Russian crude and oil products;

- The state of the world economy, with expectations that demand will decline as the global economy continues to slow amid high inflation and tighter monetary policy;

- The outlook for oil demand in China, the world's biggest importer, which is trying to achieve often contradictory goals of stimulating a soft economy while maintaining tight controls to limit the spread of COVID-19; and

- The ongoing failure of OPEC+ members to produce anywhere close to their stated output targets.

Much of the focus in global oil market has been on the G7 price cap and the EU ban on Russian crude oil imports, both of which commence today.

Estimates vary as to the extent of the impact, with some analysts saying as much as 1.5 million barrels per day (bpd) of Russian crude could be lost to the global market.

However, physical traders are far less worried, believing that the market will be able to re-route most Russian crude and work around the sanctions.

The Russians have said they won't sell any crude that is subject to a Western price cap, even if it means reducing production.

Then there's the question as to whether the price cap is even needed currently, as Russia's main western export grade of Urals ended at $63.86 a barrel on Dec. 2, not far above the $60 cap imposed by the G7.

Perhaps the more important issue for the Russian crude situation is how will barrels be moved, financed and insured, as there are likely to be constraints in tanker availability to ship Urals to Asian buyers such as China and India, and payments and insurance are also likely to become more difficult.

Over time the most likely outcome of the price cap and EU ban on Russian crude is a realignment of flows, with India and China buying more from Russia and less from West African producers such as Angola and Nigeria, who in turn will sell more cargoes to Europe.

But in the meantime there is still uncertainty over how the cap will work in practice and what tactics Moscow will adopt in response to ongoing Western efforts to punish it for its Feb. 24 invasion of Ukraine.

RECESSION, CHINA FEARS

While the Russian supply situation is potentially bullish for prices, the weakening state of the global economy and uncertainty over whether Beijing will successfully stimulate China's economy are bearish.

While there is mounting evidence of slowing global growth, it's still not guaranteed that a worldwide recession is inevitable.

The question is then what is the likely impact of slower growth on oil demand, with a range all the way from not much at all to up to 2 million bpd of lost demand in case of a sharp slowdown.

China's appetite for oil imports has picked up in recent months after a weak start to 2022, but this mainly because Beijing issued more quotas for refined product exports and because two new refineries have started up, rather than any sign of stronger domestic demand.

Stronger economic growth and easing COVID-19 restrictions in China are bullish for crude oil demand, but neither of these is locked in and the outlook is still uncertain.

Lastly, there is still uncertainty about OPEC's output relative to stated targets.

The 10 OPEC members subject to production quotas fell about 801,000 bpd short of the target in November, pumping 25.42 million bpd, according to a Reuters survey.

In theory, this means OPEC could increase production and still meet the target, but in practice this is less likely as the under-production is concentrated in two producers, Angola and Nigeria, and both will likely struggle to pump and sell more oil, even if they want to.

Overall, it's now a waiting game for OPEC+ and the global oil market to see how the various uncertainties pan out in reality.

Writing by Clyde Russell; Editing by Bradley Perrett

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Clyde Russell is Asia Commodities and Energy Columnist at Reuters. He has been a journalist and editor for 33 years covering everything from wars in Africa to the resources boom and its current struggles. Born in Glasgow, he has lived in Johannesburg, Sydney, Singapore and now splits his time between Tasmania and Asia. He writes about trends in commodity and energy markets, with a particular focus on China. Before becoming a financial journalist in 1996, Clyde covered civil wars in Angola, Mozambique and other African hotspots for Agence-France Presse.