Oil Adds to Gains on Russian Supply Threats, OPEC Cuts

Liubov Georges
By  Liubov Georges , DTN Energy Reporter

WASHINGTON (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude traded on the Intercontinental Exchange continued higher for a fourth consecutive session Thursday. The gains came amid a one-two punch of a large production cut announced by the OPEC+ group as producers switched policy course toward defending prices, and threats from the Russian government to cut all oil and refined fuel exports to any country that is part of the proposed price cap on Russian energy sales.

The European Union on Wednesday approved a fresh sanctions package against Moscow for its illegal invasion of Ukraine that includes a U.S.-led measure to cap the price of Russian oil exports. The idea behind the measure is that it should be applied as globally as possible to restrict the Kremlin's revenues. Theoretically, the measure will affect all exports of Russian oil, including China and India.

Starting Dec. 5, the EU and G-7 countries will ban banks from financing the purchase and sale of Russian oil, insurance companies from insuring shipments, and ports from unloading oil transported by tanker if it is traded at a higher price than that fixed by the EU. According to the European Commission, the exact price floor has yet to be determined. However, preliminary estimates suggest that the price should be above the breakeven level for Russian producers but considerably below the current market rate and closer to what Russia was getting paid before invading Ukraine. Following the announcement, Russian Deputy Prime Minister Alexander Novak said moves to cap the price of his country's oil will backfire and could lead to a temporary reduction in its oil output.

"This mechanism is unacceptable to Russia. The price cap creates a very bad precedent and will primarily hit the ones who are actually doing it," Novak said in a Bloomberg Television interview.

Also on Thursday, Saudi Aramco, the state-run oil giant, updated official selling prices for the markets in Europe, Asia and the United States. For European buyers, Aramco lowered its benchmark Arab Light crude for the second consecutive month, down by $1.80 bbl from September to a $0.90-per-barrel (bbl) premium over the ICE Brent benchmark. The price of its Arab Light crude sold into Asia was left unchanged at a $5.85-per-bbl premium over the average of the Oman and Dubai benchmarks. For the U.S. buyers, prices were raised by $0.20 per bbl to a $6.35-per-bbl premium over the ASCI benchmark.

The price move follows the controversial decision by the OPEC+ group to cut collective oil production by 2 million barrels per day (bpd) for the month of November -- the largest output reduction since April 2020 when producers were forced to slam breaks on output in light of collapsing demand. Most of the announced 2 million-bpd production cut would fall on the shoulders of five OPEC+ producers, led by Saudi Arabia and Russia that would equally reduce crude output by 526,000 bpd. Iraq agreed to cut output by 220,000 bpd, United Arab Emirates by 160,000 bpd, and Kuwait by 135,000 bpd. Combined, OPEC members account for 1.273 million bpd of the announced cut, while Russia-led producers will reduce oil output by 727,000 bpd. It is notable that OPEC+ members have been producing far below their official target levels for months now. In August, OPEC+ underproduced against their quota by 3.4 million bpd, meaning the volume that would be removed from the market in November would be smaller than 2 million bpd. Still, even a cut in the ballpark of 700,000 to 1 million bpd could considerably tighten the physical oil market.

Goldman Sachs raised its fourth-quarter forecast for Brent to $110 per bbl and said the OPEC+ reduction could prompt the International Energy Agency to coordinate a release of reserves. Morgan Stanley said the move will accelerate crude's path back to $100 per bbl.

At settlement, November WTI futures advanced $0.69 to $88.45 per bbl, and ICE Brent futures for December delivery rallied to $94.42 per bbl, up by $1.05 on the session. NYMEX November RBOB futures added 1.29 cents to $2.6814 per gallon, and front-month ULSD futures surged 17.80 cents for a $3.8649-a-gallon settlement.

Liubov Georges can be reached at liubov.georges@dtn.com

Liubov Georges