MC Explains: OPEC+ decides to keep oil production unchanged amid sanctions on Russian oil. What can this mean for India?

The Organization of the Petroleum Exporting Countries (OPEC) and its allies, commonly known as OPEC+, decided on December 4 to keep its oil production unchanged, just two days after the Group of Seven (G7) nations agreed on a price cap on Russian oil.

The decision by OPEC+ has added to volatility in the market, which has seen high uncertainty due to the imposition of sanctions and price caps on exports of Russian oil by the European Union (EU) and the G7 countries.
This explainer looks at the OPEC+ decision and other factors that will guide crude movement, going ahead.

What has OPEC+ said?

The group of oil-producing nations has agreed to reduce oil production by 2 million barrels of oil per day (mnbopd), which is its existing policy, from November 2022 until the end of 2023.

To support the price of crude oil, it was earlier expected that OPEC+ might further cut oil production.

Key ministers of OPEC+ will meet again in February to discuss its strategy for the upcoming months and a full meeting is scheduled on 4th June 2023.

What has been the impact of the OPEC+ decision?

Brent crude, which hit a 14-year high of more than $139 a barrel after Russia's invasion of Ukraine, was trading at $88.10 on December 5. Reacting to the decision from OPEC+, oil prices rose 3 percent on December 5 with Brent crude trading at $88.10 and WTI crude at $82.38.

Experts believe that the group decided to maintain oil production guidance at current levels in view of the disruptions caused by the uncertainties over Chinese demand and Russian supply.

"The decision ... is not a surprise, given the uncertainty in the market over the impact of the December 5 EU Russia crude oil import ban and the G7 price cap," said Ann-Louise Hittle, Vice President of consultancy Wood Mackenzie, as per a Reuters report. "In addition, the producers’ group faces downside risk from the potential for weakening global economic growth and China’s zero Covid policy."

Other key factors affecting crude prices

The price cap imposed on the exports of Russian oil by the G7 countries — Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, with the European Union as a “non-enumerated member”— kicked in on December 5.

The G7 has agreed to set a price cap of $60 per barrel to hamper Russia’s largest source of income, while also allowing its oil into the market to limit the impact on global prices.

According to the G7 decision, companies providing transportation services, such as shipping and insurance will only handle Russian cargo if oil is purchased below or at the price cap.

The decision could have an impact on oil exports from Russia as the world's key shipping and insurance firms are based in G7 countries.

What is Russia’s response?

Despite the threat from the G7 price cap, Moscow has been firm in its decision to not provide oil to the countries which agree with the price cap even at the cost of cutting down its production.

Russia, the second-largest producer of crude oil in the world, has said that it does not agree with the price cap and warned of destabilising the market by limiting the supply of oil.

Russia has been diverting its oil supplies from its traditional market of Europe to countries in Asia.

China, the second-largest consumer of oil in the world, has been buying oil at discounted prices from Russia. China’s President Xi Jinping recently said that China is willing to work with Russia to forge a closer energy partnership.

Where does India stand?

For the price cap imposed by G7 to be successful, it is important that countries, including India and China, also abide by it.

However, India is also getting discounted oil from Russia, and Moscow has joined the list of top oil exporters to India.

Union Minister for Petroleum and Natural Gas Hardeep Singh Puri has often said that India will examine the prospect of a price cap on Russian oil and will respond according to its supreme national interest.

Brokerage firm Motilal Oswal said that the decision would not affect its estimates in any way and that it maintains its forecasts. “This comes after the group had decided to cut oil production by 2 mnbopd from August 2022 levels starting November 2022. The decision was driven by market considerations and OPEC+ recognised the need to stabilise global oil markets by being proactive and pre-emptive.”