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Oil Price: Will OPEC Add Fuel to the Fire as Oil Prices Cap Disrupts the Market?-Nov. 25th, 2022

Oil Price Today, Nov. 25th, 2022

Oil Price BBI Info

1. Market review: Affected by the Thanksgiving holiday in the United States, the crude oil contract ended trading ahead of schedule, and intraday trading was light. Crude oil fell first and then rose. WTI crude oil once fell below US$77, and finally closed up 0.65% at US$77.94/barrel; Brent crude oil fell below US$84 on a daily basis, and finally closed up 0.57% at US$85.01/barrel.

2. The world economy will be as weak next year as it was in 2009 after the financial crisis, as the Ukraine conflict threatens to turn into a “permanent conflict”, the Institute of International Finance (IF) said.

3. In the debate on price caps on Thursday, some EU countries were dissatisfied with the proposal for a natural gas price cap of 275 euros per megawatt hour, and energy crisis measures were temporarily put on hold until mid-December. The statement shows that EU energy ministers have agreed on a preliminary mechanism for capping price changes in TTF natural gas trading days. European Union governments will resume talks on a cap on Russian seaborne oil prices on Thursday night or on Friday.

4. Russian President Vladimir Putin said on Thursday that the West is targeting Russia
A price cap on oil exports will have a negative impact on global energy markets. Kremlin spokesman Dmitry Peskov told reporters that the oil price cap is really meaningless because Russia simply does not supply oil and gas to countries that support the price cap. In addition, Putin said that there is no need for additional measures for special military operations at this time.

5. According to RIA Novosti on Thursday, citing the Russian Federal Security Service, the agency successfully thwarted a conspiracy to blow up the “South Stream” natural gas pipeline. Through this pipeline, Russia sends natural gas to Turkey, which indirectly supplies Europe.

6. According to people familiar with the matter, Chevron may soon obtain approval from the United States to expand its business in Venezuela and resume oil trading, and the United States may ease oil sanctions on the country.

7. Indian Oil Minister: India is expected to Yana buys more oil.

8. According to media reports, the German government has drawn up plans to levy a windfall profit tax of 90% on the excess income of some clean energy power generation companies such as photovoltaics, offshore wind farms, and nuclear power to fund its consumer assistance program.

9. The Vice President of Ghana said that the Ghanaian government is negotiating a new policy regime to use gold to buy oil products amid the reduction of foreign exchange reserves. Once implemented, this will be one of the most important economic policy changes in Ghana since independence.

Oil Price Market Viewpoints

1. December is not the time for OPEC to jump in
OPEC+ is likely to keep quotas unchanged at the December meeting. Motivations for avoiding production cuts may include:
① Chinese refineries are running towards the high end of the range, making the pre-blockade state more stable;
②The U.S. oil market has been tightening again since the middle of the year; ③The oil price is still higher than the low before OPEC decided to tighten production quotas in October (Brent $84/barrel).
The main motivation for avoiding an increase in production is that OPEC has yet to get meaningful data given that the second phase of the refined oil ban may have a bigger impact, and that the impact of the EU embargo and G7 oil price cap has not yet begun to materialize. Secondly, increasing production quotas (no matter how small) will bring about difficulties in OPEC’s communication with the market. The decision to keep production unchanged in December will also help OPEC stabilize the market from the standpoint of avoiding unnecessary increases in market volatility.

2. Feasibility and Consequences Analysis of G7 Implementing Crude Oil Price Cap The Group of Seven (G7) is considering setting a price cap on Russian oil at C$65-70/barrel. If the price cap is set too low, Russia will be forced to fight back, Selling its crude at a discount to international oil prices, maintaining most of its exports through a large “shadow fleet”, independent of the G7’s financial and transport services, would in turn lead to higher global oil prices.
And a higher price cap could lead to a reduction in supply. More importantly, the price ceiling will fluctuate with changes in international oil prices, because the motivation of the game will change with global prices, supply and demand balance and discounts. This can lead to a backward-bending supply curve because supply actually decreases as prices rise.
Given our forecast of $110/bbl for Brent in 2023, we think the oil price ceiling needs to be raised above $80-85/bbl next year.

3. OPEC+ may maintain original production quotas
There is still a lot of uncertainty about Russia’s crude oil production, coupled with wild swings in oil prices and mounting recession fears, and OPEC+ needs to make tough decisions. Although the United States is considered to be the biggest obstacle to OPEC+ production cuts, from the perspective of the balance of crude oil supply and demand, maintaining the current output may be the first choice. We believe that the best strategy for OPEC members is to maintain current production targets at the next meeting and wait for relevant information from Russia and react accordingly at a later meeting.

4. European gas prices face upside risks
European gas reserves are above average, but the risk of shortages remains, although European gas reserves are about 5% above the 10-year average, but still within the range covered in these years. Disruptions to domestic gas production, pipeline gas or LNG imports can quickly bring European storage levels below average. Buffer reserves are running low this winter and there is also the problem of refilling gas storage in 2023. For reference, we forecast UK NBP gas prices at $35/MMBtu in 2023, $40, $30, $30, and $40 in the first to fourth quarters, respectively.

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