Oil Slides as OPEC+ Reportedly Mulls Russia Exclusion from Group Output

© Reuters.

By Barani Krishnan

AiVIF.com -- Oil consumers — and market bears — may be getting a little of what they want.

Some OPEC members are exploring the idea of suspending Russia’s participation in the alliance’s oil-production deal as Western sanctions and a partial European ban begin to undercut Moscow’s ability to pump more, the Wall Street Journal reported.

“Exempting Russia from its oil-production targets could potentially pave the way for Saudi Arabia, the United Arab Emirates and other producers in the Organization of the Petroleum Exporting Countries to pump significantly more crude, something that the U.S. and European nations have pressed them to do as the invasion of Ukraine sent oil prices soaring above $100 a barrel,” the Journal reported, citing OPEC sources familiar with the move.

The news swiftly cut oil prices down from their highs on Tuesday, reversing a four-day rally.

London-traded Brent, the global benchmark for crude, was down $1.22, or 1%, to $116.38 for a barrel meant for August delivery by 2:45 PM ET (18:45 GMT). It peaked at $120.80 earlier on Tuesday.

New York-traded West Texas Intermediate, the benchmark for US crude, settled Tuesday’s trade down 40 cents, or 0.4%, at $114.67 for its July delivery contract.  It traded as high as $119.97 earlier in the session.

Brent hit 14-year highs of just above $139 on March 7, some two weeks after Russia’s invasion of Ukraine set a raft of Western sanctions against Moscow’s energy and other exports. WTI reprised its own 2008 high the same day, reaching just above $130. There had been strong expectations that the two benchmarks will return to their March highs this week as the European Union announced on Monday a ban on most Russian oil imports after two months of haggling.

Crude prices still finished up strongly for May, with Brent poised for a 6.5% return and WTI 10%, for a sixth straight month of gains.

But the OPEC move reported by the Journal put a different, albeit, unknown spin on the market.

Russia’s oil output is expected to fall by about 8% this year. But it couldn’t be determined whether Moscow would agree to be exempted from the production targets of OPEC that also involves 10-non OPEC countries banded together with OPEC under a broader group OPEC+.

For more than a year now, Saudi Arabia, which heads the 23-state global oil exporters alliance OPEC+, has ensured that the countries in the group provide less crude than needed by the market in order to maintain optimum prices for a barrel. While the supply crisis was still manageable until the end of last year, the Ukraine invasion and resulting sanctions on Russia led to disruptions of at least ​​3 million barrels more per day, leaving consuming nations with virtually no breathing space.

Worsening the crisis, the United States is experiencing a severe squeeze in the supply of gasoline, and particularly diesel, from the closure and downsizing of several refineries during the coronavirus pandemic.

US refineries that have stayed in the business are now providing only what they can — or, more accurately, what they desire — without putting any of the money into expanding existing capacity or acquiring the idled plants that can be reopened to provide some measurable relief to consumers. One motivation for the refineries to do that: record profits from the current situation that may be diluted in an expansion. The other is the long turn-around time for any new refinery to deliver a profit.

Bloomberg estimates that more than 1.0 million barrels per day of U.S. oil refining capacity — or about 5% overall — has shut since the COVID-19 outbreak initially decimated demand for oil in 2020. Outside of the United States, capacity has shrunk by 2.13 million additional barrels a day, energy consultancy Turner, Mason & Co says. The bottom line: with no expansion plans on the horizon, the squeeze is only going to worsen.

“So far, there is no formal push for OPEC to pump more oil to make up for any potential Russian shortfall, but some members in the Persian Gulf have begun planning for an output increase sometime in the next few months,” the Journal reported, citing OPEC delegates.