Oil prices have suddenly started climbing due to concerns over the tightening of Russian oil exports to China and India. This shift is likely to push these nations to seek additional oil volumes from Gulf suppliers and African crude oil sources. Meanwhile, Russian gas continues to flow to Europe through established pipelines, with little impact from sanctions. At the same time, the U.S. administration is trying to limit Iranian oil exports to reduce its supply to below 500,000 barrels per day, down from about 1.5 million barrels.

This action, along with reduced global supply, is expected to push oil prices beyond the current $75 per barrel. The firmness of oil prices is unlikely to result in a decrease in the short term, as the current U.S. administration hopes. U.S. producers cannot afford to see prices drop much below $80 per barrel, as this would not cover their production costs. In addition, lower prices could hinder their goal of increasing production to 15 million to 20 million barrels per day by 2030. In the meantime, OPEC+ is waiting to release its captive oil volumes, approximately six million barrels, which are readily available to hit the markets. These volumes have been held back for two years to cover investment costs without any return. Most OPEC members are eager to resume production and release these volumes after two years of captivity. With the current tightness in crude oil supply, the market seems ready to absorb additional volumes from OPEC, especially if Russia and Iran are forced to curtail their sales under the U.S. administration’s policies. As of today, OPEC is producing around 27 million barrels per day, excluding Russian supply, and has six million barrels of spare capacity. This spare capacity could meet any additional demand, particularly if it involves replacing oil supplies from Russia or Iran. Some OPEC members are also eager to be allowed to release their crude oil onto the markets.

The current oil situation is driving higher prices for crude oil with higher sulfur content, such as Kuwait crude, which is selling above Brent crude, the lower sulfur variant. Brazil is charging $5 per barrel per annum over Brent crude oil. Also, the shipping costs to China have increased by $2 compared to previous months. China is trying hard to secure any available crude to address concerns over tightening supply from Russia. Oil prices are unlikely to decrease, as the market faces pressure from a tightening supply of more than 6-7 million barrels if Russia and Iran are forced to curtail production to the minimum. With higher oil prices, inflation is expected to rise globally, and this will certainly displease consumers, who may place the blame on OPEC. However, OPEC has nothing to do with this. It is working on releasing more crude oil volumes into the market to help ease global inflationary pressures.

By Kamel Al-Harami

Independent Oil Analyst

Email: [email protected]