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The oil market is constantly changing as the embargo deepens; China, India ask for Russian discount


Two of the things that threatened to cause major shocks in the oil market in a year of big changes in the industry pushed back on Monday, as more inflation data sent oil prices lower. Meanwhile, OPEC+ decided to keep its quota cuts steady from October, when the European Union kicked off the final phase of its embargo on Russian crude.




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On Sunday, the Organization of the Petroleum Exporting Countries and its allies, including Russia, surprised analysts by agreeing to keep oil production targets unchanged. The group startled the market by announcing cuts of two million barrels per day in early October, forecasting a slowdown in global demand.

On Monday, the EU imposed the next step in a ban on Russian oil purchases, forcing the Netherlands, Italy, Bulgaria and Croatia – the EU’s final customers to buy Russian oil – to also go elsewhere to buy crude. their.

“The flows have stopped, but they have simply been redirected,” said Matt Smith, lead oil analyst for the Americas at Kpler. India is taking a large portion of the diverted Russian oil, Smith said, in an amount equivalent to an axis that is re-establishing global oil trade routes.

Oil market moves on Monday

On Monday, oil markets rallied early on news of further China easing strict no covid policy. US crude then reversed course and fell 3.3% to below $78 a barrel. Brent crude oil prices also fell about 3%, staying above $83. The reversal came after US services data raised concerns that the Federal Reserve could continue to raise interest rates aggressively.

Meanwhile, US natural gas also fell sharply, falling more than 10% on Monday. This was driven by increased supply and expectations of mild weather across the US over the next two weeks. The data also showed that European natural gas demand also fell 24% in November compared with the five-year average for the month.

Oil market: OPEC+ decision

The decision by OPEC and its allies on Sunday to maintain the current quota policy seems to signal that the group believes it has made the right decision on oil demand when it meets in October. OPEC+ scheduled the next meeting in June.

Smith, of Kpler, said in an interview that this shows the oil group plans to maintain a cut of 2 million barrels per day for the next six months.

Smith said if crude prices start to return to $90 a barrel, the group “has a reason not to do anything.”

However, he added that if prices continue to stay around $75-80 per barrel, OPEC+ may consider convening again to make additional cuts.

“We believe the likely impact of rate hikes and the ongoing situation with China will weigh on the market to the point where prices will remain anchored in this $80-90 region,” Smith said. “.

Ann-Louise Hittle, head of macro oil at Wood Mackenzie, said Sunday “given the uncertainty in the market”, the OPEC+ decision is not a surprise.

“The group of manufacturers faces downside risks from China’s ability to weaken global economic growth and its Covid-free policy,” said Hittle.

Oil market: EU embargo and price cap

ING Group analysts Warren Patterson and Ewa Manthey wrote on Monday that the EU’s decision to set a ceiling higher than what Russia is getting for its Urals crude “raises questions about the extent of its effectiveness.” of the ceiling at the moment.”

Third Bridge analyst Peter McNally told IBD that neither the EU embargo nor the $60 price cap on Russian crude is likely to dampen sales.

“The ceiling is very important if it takes Russian physical supplies out of the market,” McNally said. According to McNally, Russia received $55-60 in sales to China and India.

However, he added that if the price of Brent oil reaches $100 a barrel, that could encourage Russia to withdraw crude from the oil market.

“There is one very important consideration in the oil market: inventories remain low,” McNally said. “An actual disruption in supply or a significant increase in demand can cause already low inventories to be extremely low.”

Russia begins to reduce the price of replaced barrels

Russian crude oil prices fell 8% to below $64 on Monday as the embargo deepened. A relatively small amount of oil-related products is still shipped to some EU countries via rail and pipeline. However, all oil sales by sea have now been stopped. The ban will extend to the rest of Russia’s oil-related goods on February 5.

Pakistan’s Oil Minister confirmed on Monday that Russia has agreed to supply discounted crude oil, gasoline and diesel to Pakistan, according to news service oilprice.com. China and India have not agreed to the EU price ceiling. But the EU embargo makes the pair Russia’s top oil customers. Both have demanded steep discounts according to oil.com prices.

In addition, Chinese authorities said on Monday they would cut gasoline and diesel prices by 440 yuan, about $62.51/tonne, and 425 yuan, $61/t, respectively, due to demand forecasts. demand decreases. The cuts were set to go into effect starting Tuesday.

Where Russian oil will go will become clear in the “coming days and weeks,” Smith said.

EU countries are probably looking for a combination of sources. Flows from the United States, Latin America and the Middle East have increased significantly.

“The EU embargo is unlikely to have an impact on the oil market on its own,” McNally said. “The plan has been in the works for months and buyers have found alternative sources of supply. It’s not an overnight decision, it’s an immediate decision.”

Please follow Kit Norton on Twitter @KitNorton for more insurance.

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