OPEC MEETS AS US DEADLINE LOOMS OVER RUSSIA
As Russia’s war in Ukraine continues to grind on, the recent OPEC+ meeting took place over the weekend, agreeing to increase production. But it’s Washington’s hardening line on Russia that is the major market focus. The US has stated that unless Russia makes serious moves towards a ceasefire by August 8, the US could impose a new wave of oil (energy) sanctions.
• OPEC+ AGREES TO INCREASE PRODUCTION ON AUGUST 3RD
On August 3rd, OPEC+ signed off on another production increase totalling 547,000 barrels per day from September. The number was broadly in line with market predictions, and OPEC+ agreed to meet again on September 7th to set production targets for October. OPEC believes that the cartel can continue to unwind previous output cuts without causing a negative impact on oil prices, due to the belief that oil demand remains strong and the market is in balance.
• RUSSIA / UKRAINE AND US COUNTDOWN UNTIL AUGUST 8th DEADLINE: IMPACT ON OIL
Back in June, President Trump gave Russia a 50-day deadline to show real progress towards peace in Ukraine. The US appears to be slowly losing patience with Russia, after initially being accused of a more pro-Kremlin stance on Ukraine. The deadline has since been cut with Trump warning on July 29 that Russia has until August 8 to come to the table or to face a range of sanctions targeting its energy trade. Talks between Russia and Ukraine have not gone far: Putin has not met with Zelensky, and the only visible progress has been some prisoner exchanges. While reports suggest a top US official, Steve Witkoff, will fly to Moscow, days before the deadline, it appears unlikely that a major breakthrough could be achieved.
• WHAT COULD SANCTIONS AGAINST RUSSIA LOOK LIKE: INDIA ALREADY TARGETED
If the deadline passes without action, the US could unveil measures including total bans on US insurers connected to Russian oil cargoes. Secondary sanctions could hit foreign banks, traders, and ship-owners who assist with Russia’s so-called ‘ghost fleet’ of seaborne transport. Russian companies could face difficulties in using US infrastructure. Trump has already threatened to impose tariffs on Russian exports to the US, although the volume is small. But the US could also target Russian platinum, palladium, natural gas, and copper exports. These are the more direct measures Russia could face, but secondary sanctions or tariffs could make sanctions even more effective. The US has threatened countries that import Russian oil with large tariffs. The US has already stated that India, a major importer of Russian oil, faces a 25% tariff and could face more “penalties” due to its trade with Russia. India is already reportedly decreasing its purchases of Russian oil, importing from the Middle East or directly from North America instead. Market participants believe that if the US imposes these sanctions, it could squeeze a lot of Russian oil out of the global market, which could push oil prices sharply higher. Russia, already facing economic strain due to falling oil and gas revenues, which contribute to 40% of federal revenue, could be forced to reconsider its position on Ukraine.
• OIL MARKET REACTION
Although the Fed interest rate decision and Nonfarm payrolls data took place, major oil analysts agreed that much of the oil market’s focus over the week of July 28th to August 1st was on potential oil sanctions on Russia. The reaction was that oil prices jumped above $70 for the first time in over a month after Trump laid a firm August 8 deadline.
Conclusion
In terms of oil prices, there are two broad scenarios; if Russia gives a firm commitment to the US of sitting down with Ukraine - for example, by scheduling a meeting between Putin and Zelensky - this could be enough to avoid sanctions, and oil prices could pull back. However, if Russia decides against any compromise and the US hits Russia and other countries hard with sanctions or tariffs, it is possible that oil prices could rise sharply. It’s also possible that the US could decide to take a softer approach, which could cause less impact on oil markets. Whatever decisions are made, it appears as if the economic screws are tightening against Russia.