OPEC+ Update
Dec. 9, 2022
The Organization for Petroleum Exporting Countries (OPEC) and its allies including Russia, collectively known as OPEC+, agreed to stick to their October plan to cut output by 2 million b/d from November through 2023. This decision came one day before the EU ban and a G7 price cap on Russian crude. The G7 and Australia last week agreed on a US $60/barrel price cap on seaborne Russian oil. Meanwhile Russia has stated they “will not accept” a price cap on its oil and will not supply oil to countries that implement the cap. The G7 price cap will allow non-EU countries to continue importing seaborne Russian crude but will prohibit European shipping, insurance, and re-insurance companies from providing service on cargoes of Russian oil around the globe, unless it is sold for less than US $60/barrel.
One key question is the extent to which OPEC+ production could trend upward early next year, signaling a change in policy. While OPEC has raised concern about a weaker economic environment next year, if Russian oil output and exports decrease due to the price cap and embargoes, Middle East producers may be willing to step up and fill the void. In the event OPEC+ (excluding Russia) adds more volume to the market, we believe this would be concentrated in the Middle East given that countries such as Saudi Arabia, UAE, Kuwait are some of the few that have additional output capacity.
McQuilling analysis shows that mid-sized tankers would benefit in this scenario, helping offset lost demand from missing Russian cargoes. While VLCCs would be involved in delivering Middle East crude oil to Europe, a significant portion of this flow would transition to Aframax demand loading in Egypt where the Sumed pipeline, connecting the Red Sea and Mediterranean Sea, ends.
Figure 1 – Substitution for Sanctioned Russian Imports Europe, US, Other
Source: McQuilling Services, *Other Asia excludes China & India, *Americas includes Others
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