A high commodity price environment over the last quarter, coupled with operators remaining disciplined with their spending, has resulted in massive profits for major oil producers.

Despite the OPEC+ recent decision to increase production for September by only 100,000 barrels per day, crude oil prices fell to $92 per barrel, showing marginal easing of fundamentals and probably a change of perception in the markets.

Prices have actually declined on weakening market sentiment, amid growing concerns over a sharp economic slowdown and the resulting potential impact on global oil demand.

The price decline was triggered by data reported by the US Energy Information Administration, showing weak US seasonal demand for gasoline that had fallen to 2020 levels. However, market backwardation slightly strengthened despite falling front-month contracts.

Other factors to consider

Russian exports of liquid natural gas did not change much in total volumes, but a shift occurred in exports away from Europe and the US, toward India, China and the Middle East.

Low global distilleries inventories at the end of winter last year, coupled with the fear of post-COVID-19 retraction in demand and disruption in Russian’s productions, have all caused markets concerns. However, refiners have increased runs as margins were high resulting in a recovery of distillate stocks.

Chinese demand remains limited by COVID-19 closures. Oil demand in China was at 14.7 million bpd in the first quarter of 2022 and 15 million bpd in the second quarter of 2022. This played a major role in affecting overall prices.

Drawdowns in the US Strategic Petroleum Reserve have helped to marginally ease the supply situation and influenced prices, but unfortunately this will end ahead of winter.

OPEC+ confirmed a 648,000 bpd increase in its output quota for August, in line with the agreed level at the previous ministerial meeting in June.

This decision was made against a backdrop of mounting inflation, higher oil prices and a global demand recovery that was tightening oil market balances.

In July OPEC+  was at the final stage of unwinding the roughly 10 million bpd cuts it had implemented earlier in May 2020 due the pandemic.

During their latest meeting in August, OPEC+ decided to increase September production by 100,000 bpd. This relatively symbolic increase was followed by various comments to explain such action.

It seems as if they were testing the market’s reaction. Some market participants have noted that the severely limited availability of excess capacity necessitates utilizing it with great caution in response to severe supply disruptions.

The underinvestment in the oil sector has reduced excess capacities along the value chain. Concerns that insufficient investment into the upstream sector will affect the availability of adequate supply in a timely manner to meet growing demand beyond 2023.

Moreover, there are also questions on the feasibility of imposing price caps on Russian crude oil.

The plan was intended to allow Russian oil to flow without creating excess revenue to fund its war in Ukraine. This was an attempt to reduce the tensions from the sanctions imposed by the EU, to avoid a global recession triggering a major supply crunch.

Meanwhile, Russia was still exporting 7.5 million barrels per day of crude and products, about 400,000 barrels per day less than what they were exporting before the February invasion.

Price cap on Russian crude

For the price cap to actually work, the remaining buyers of Russian crude oil would have to agree to the price cap. Countries should not be allowed to re-trade cargoes for profit, even though verifying the price of Russian crude purchases independently and reliably would be a problem.

Another major challenge to be taken into consideration, would be to successfully stop market abuse in case it occurs.

Russia reacted quickly saying that any attempt in this direction will be faced with a halt of exports to the markets.

Russian President Vladimir Putin reacted to the proposed oil price cap by stating that such a policy would lead to price spikes similar to those seen in natural gas markets.