OPEC+ Keeps Oil Curbs Despite Russia Price Cap

Group led by Saudi Arabia and Russia also faces slowing demand in China

OPEC+ said Sunday it would lock in current production levels, a pause that suggests the world’s leading oil producers are uncertain about the direction of crude prices with a price cap on Russia’s petroleum exports set to take effect.

The decision on Sunday allows the Organization of the Petroleum Exporting Countries and a group of producers led by Russia—collectively known as OPEC+—to take more time to assess the market impact of an EU and Group of Seven price cap, which is intended to crimp Russia’s revenue for the Ukraine war. It locks in a 2 million-barrels-a-day production cut decided in October.

The cap is set to go into effect on Monday, with both oil traders and government energy officials uncertain about how it will affect the market. An EU ban on most imports of Russian oil begins the same day. Then on Thursday, Chinese President Xi Jinping is expected to travel to Saudi Arabia, where energy markets are set to be on the agenda in discussions between the world’s largest oil importer and largest oil exporter, respectively.

Also coming up as soon as Monday: Saudi Arabia is expected to announce its prices for spot-market customers in Europe, Asia and the U.S., which will be closely watched for signs of the kingdom’s own view of the market.

OPEC had considered an array of options before Sunday’s unusual meeting, which was abruptly changed to a virtual gathering after initially being billed as in-person. OPEC normally meets during the workweek, but this meeting was scheduled for the weekend ahead of the price cap and EU embargo, without explanation.

Some members had advocated for a production increase heading into the meeting, pointing to the potential for disruptions of Russian oil that some analysts put at 1 million to 1.5 million barrels a day following the price cap. Russian officials on Sunday reiterated that they won’t trade any oil at all with nations that implement the price cap.

But in the days before the meeting, a consensus formed that it wasn’t the right time to increase output, OPEC delegates said. Prices have fallen 13% in the past month, and dropped 5% in one day last month when The Wall Street Journal and other organizations reported on talks of an output increase.

Prices have since stabilized, but Brent crude, the international benchmark, was at $85.42 on Friday, and WTI, the U.S. benchmark, was at $80.34—far below the $90 a barrel level where some oil-market analysts say the group wants to see prices.

Some OPEC members, including Saudi energy minister Prince Abdulaziz bin Salman, floated the idea of another production cut, following the 2 million-barrels-a-day cut in October that surprised the White House and angered much of Washington. A cut would have shown that OPEC+ was concerned about Chinese lockdowns designed to stop a resurgent Covid-19 outbreak and their effect on demand—worries that have pulled oil prices down in recent days.

OPEC and oil traders have reacted with uncertainty to the G-7 and EU price cap. The U.S. and its allies designed the price to cut into Moscow’s oil revenue while keeping Russian oil, a key part of global supply, available on the market. It aims to take advantage of the concentration of key maritime services in the West to try to curb Moscow’s ability to wage war in Ukraine.

Oil prices also fell Friday after the EU agreed to the cap, as traders discounted fears the mechanism will force much Russian oil out of the market and cause a supply issue. Russian crude has traded at a steep discount this year, with Argus Media, which assesses commodity prices, pegging the price at about $48 a barrel.

Still, OPEC delegates have said its production plans may be revised upward early next year. They said they trust estimates that Russian oil exports could fall by over 1 million barrels a day of crude due to the price cap. The prediction is consistent with the International Energy Agency, which advises consumer nations, and foresees a decline of 1.4 million barrels a day. Russian oil production stood at 9.9 million barrels a day in October.

Helima Croft, the chief commodities strategist at Canadian broker RBC, said Russia may well follow through on its threats to stop selling to buyers implementing the price cap. “To date, Moscow has followed through with multiple disruption threats,” she said.

Meanwhile, Srijan Katyal, global head of strategy at Emirati broker ADSS, said fears of a global recession and inflation rates could send oil prices down into the lower $60s.

The alliance isn’t planning to review its production until its next meeting on June 4. But OPEC said Sunday it was ready “to meet at any time and take immediate additional measures to address market developments” if needed.

OPEC+’s decision to cut production in October angered the White House and congressional Democrats, who said it undermined global efforts to blunt Russia’s war in Ukraine and viewed it as a political slap in the face to President Biden, ahead of midterm elections. But U.S. officials have said privately in recent days they wouldn’t complain to the cartel if it kept curbs as prices have eased significantly, according to people familiar with the matter.

OPEC delegates said they didn’t have more clarity Sunday on how a Russian oil price cap would affect the market than they did in October, when they announced the production cut. Back then, on Oct. 5, Prince Abdulaziz said he had never encountered a more uncertain period in the oil market in his career.