Price cap on Russian crude poses a conundrum for Opec+

Welcome back to Energy Source.

I have a story up on the site on Venezuela’s petropolitics. The Biden administration has eased sanctions on what American oil supermajor Chevron can do in the country, allowing it to lift output and start imports into the US again. The first cargo since sanctions were imposed in 2019 could sail into the US Gulf Coast as soon as this month, I’m told.

A couple of big takeaways for me: the move is not a huge deal for oil markets, at least not yet. The additional supply at first will be minimal — and likely slow to arrive.

But if political talks progress between Venezuelan president Nicolás Maduro and the opposition, and sanctions continue to loosen, more substantial volumes could start coming later next year. It’s certainly worth watching.

Also fascinating is the role of domestic US politics. The Cuban and Venezuelan diaspora in Florida, typically a crucial electoral battleground, have been a big driver of relatively hardline policy towards leftist governments in Latin America across both Democratic and Republican administrations. Neither party wanted to alienate the groups for fear of losing a decisive electoral bloc.

But the sweeping victories by Republicans in Florida last month could be changing this calculus. The Biden administration may now feel like there’s less of a political price to pay for engaging with Venezuela, especially if it can deliver a win on fuel prices.

In today’s newsletter, Derek raises the curtain on Sunday’s Opec+ meeting. The cartel looks likely to stay the course on output amid a storm of uncertainty in the market. And Amanda has new polling, conducted by Morning Consult exclusively for the Financial Times, showing that Americans are saving less and cutting spending in order to pay for fuel.

Thanks for reading. — Justin

What to expect from this weekend’s Opec+ meeting

Saudi Arabia, Russia and other Opec+ members meet again on Sunday — virtually, not in Vienna as planned — and rarely has the oil market’s direction been so difficult to fathom. A small cut remains possible, but the likeliest outcome is that the cartel holds pat, according to people familiar with the discussions, sticking with the production cuts announced last month that so enraged the US. Three central reasons include:

1. Russian uncertainty

The EU embargo on Russian crude exports, including a ban on insurance for ships carrying that crude, takes effect on Monday. But as things stand, the US’s price cap plan has not yet been finalised by allies in Europe.

To summarise, the price cap is designed to give importers outside the EU a way to keep buying seaborne Russian crude without losing European insurance for their vessels — a carve-out for the embargo. But no price cap, no carve-out, no insurance. So the clock is ticking to get the price cap plan in place.

The argument in the EU in recent days is between hawks who want the price cap set well below the prevailing market price for Russian oil, and doves who endorse the US idea of setting it at about that current price. Meanwhile, Russia has warned that it will halt exports to anyone observing the cap.

The upshot? Come Monday, there’s a chance Russian oil supply begins to plunge. Or a chance it remains roughly intact. No one can say. And in that case, Saudi Arabia may be wiser to wait and watch, responding with more, or less, supply when it sees how the embargo and price cap play out.

2. The earlier cuts haven’t had much time to work yet

And anyway, the 2mn barrels per day quota cuts — the ones announced in October that so angered the US — have barely had time to tighten the market much. Refinitiv estimates that of the 1.27mn they were on the hook for, Opec members have delivered just 710,000.

A perception of oversupply is visible in the futures curve for Brent, which has slipped into mild contango (a market structure in which spot prices are cheaper than prices for oil delivered later). Contango can take on its own bearish momentum, so Opec+ will wish to fix it soon.

First, though, it makes sense to watch what happens with Russian supply. A sharp drop starting next week would probably flip futures into backwardation (when spot prices are higher than futures contracts) again quickly, without any intervention from the cartel.

3. Conflicting macro indicators

The economic signals are mixed. In recent days, independent analysts have had a rather gloomy message for Opec officials, at least about global demand in the coming months. Weak Chinese consumption remains the big worry for Opec and others in the market.

On the other hand, better news from western economies, including some hope that inflation is cooling, has helped to stabilise oil prices in recent days. Brent yesterday settled at $85.43 a barrel, about 6 per cent up from its low last week — hardly a price to induce panic in Riyadh.

All this adds up to Opec+ sitting this one out, and waiting for the big market event on Monday, when the embargo starts.

“The last-minute change to a virtual meeting suggests there is no arm wrestling needed,” said Bill Farren-Price at Enverus. “A rollover would offer more time to figure out how much Russian oil will be lost due to EU sanctions and whether the group’s own cuts will be sufficient to counter fragile demand.”

Helima Croft at RBC Capital Markets agreed that while the virtual meeting “increases the likelihood” of a rollover, “we expect key ministers to signal a willingness to meet quickly to address any major change in market conditions that may be arising in the coming weeks and months”. (Derek Brower)

What do you think Opec+ will do? Tell us in our poll below.

Americans are spending and saving less to afford fuel

Higher energy prices are causing shifts in US consumer spending, according to a new poll conducted by the Financial Times and Morning Consult.

More than half of Americans reported spending less on non-essentials and putting away less in savings in order to pay for fuel. One in three adults said they were working from home more often to avoid driving.

While US energy costs pale in comparison to Europe and petrol prices have come down from their record peaks in June, polling data suggest Americans are still struggling to afford fuel.

Roughly one in two adults reported difficulty affording petrol. The share is even higher for lower-income households and those without a college degree: 63 per cent of households earning less than $50,000 a year said it was difficult to pay last month’s fuel costs. 

Forty-six per cent of Americans reported the price of petrol has caused them to cut down on driving, according to the latest US Census Household Pulse Survey. 

Looming winter utility bills are also a source of stress. One in three adults reported being concerned about their ability to pay their energy bills this winter, with the majority of respondents reporting that they have lowered their thermostat in the hope of reducing their bill, according to the FT Morning Consult poll.

Concerns about heating bills are highest for households that use heating oil. Of this group, 83 per cent reported being concerned about paying their bill.

Costs for heating oil have soared in the past year, with the Energy Information Administration predicting a 45 per cent increase in bills from last winter. Homes that use natural gas for heat will see a 28 per cent year-over-year increase in winter energy bills. (Amanda Chu)

Data Drill

A handful of EU countries are purchasing last-minute Russian crude before new sanctions come into force next week.

Italy averaged 363,000 b/d in Russian oil imports in November, up 30 per cent from the previous month, according to data from Kpler. 

The Netherlands also continued to consume more than 100,000 b/d of Russian oil in November, although its imports are down by more than 75 per cent since Russia’s invasion of Ukraine.

“There’s a big incentive for everyone to buy if they put the political backdrop aside,” said Matt Smith, oil analyst at Kpler. “People are taking crude right up until the last minute here.” 

Starting on December 5, no country in the EU will be allowed to purchase seaborne Russian oil. Any tanker carrying Russian crude above a yet-to-be-decided price cap will also be prohibited from obtaining European insurance services.

However, oil analysts do not expect big disruptions to the oil market or Russian production. While a price cap hasn’t yet been decided, the proposed $65 a barrel is higher than the current price Russian crude is fetching on global markets.

The embargo will probably cause Europe to import more oil from the Middle East, and surplus Russian oil will likely shift to China, India, Turkey and other Asian countries keen to purchase cheaper oil. India imported nearly 900,000 b/d from Russia in November, more than nine times its purchases at the start of the year.

“There’s an expectation that this may not be as disruptive as some may have originally feared,” said Neil Beveridge, managing director at AllianceBernstein. (Amanda Chu)

Power Points