On the eve of Russian sanctions, oil production is decreasing

OPEC and non-OPEC oil producers could impose deeper oil output cuts on Sunday as the influential energy union assesses the impact of an expected ban on Russian crude exports and a possible price cap on Russian oil, energy analysts said.

OPEC+, a group of 23 oil-producing countries led by Saudi Arabia and Russia, will meet on Sunday to decide on the next phase of production policy.

The highly-anticipated meeting comes amid potentially crippling sanctions on Russian oil, weakening crude demand in China and rising fears of a recession.

Claudio Galimberti, senior vice president of analysis at energy consultancy Rystad, told CNBC from OPEC’s headquarters in Vienna, Austria, that he thinks the group would be better off “staying the course” and changing its current production policy.

“OPEC+ has been rumored to be considering a cut in the past few days, particularly on the back of weaker demand in China. However, China’s domestic traffic has not fallen dramatically,” Galimberti said.

Energy market participants remain wary of European Union sanctions on Dec. 5 Kremlin purchases of seaborne crude, while the prospect of a G-7 price cap on Russian oil is another source of uncertainty.

The 27-nation EU bloc agreed to ban purchases of marine raw materials from Russia from December 5 as part of a concerted effort to reduce the Kremlin’s war chest following Moscow’s intervention in Ukraine in June.

Concerns that an outright ban on Russian crude imports could drive up oil prices have prompted the G-7 to consider a price cap on the amount it will pay for Russian oil.

Reuters reported on Thursday that EU governments had tentatively agreed to limit the price of Russian offshore oil to $60, but no formal agreement has yet been reached.

“The other factor that OPEC will have to consider is really the price ceiling,” Galimberti said. “It’s still up in the air, and that adds to the uncertainty.”

The Kremlin has previously warned that attempts to impose a price cap on Russian oil would do more harm than good.

OPEC+ agreed in early October to cut production by 2 million barrels per day from November. This came despite the US urging OPEC+ to pump more to lower fuel prices and help the global economy.

The energy union recently signaled it may impose deeper output cuts to spur a recovery in crude oil prices. The signal came despite a report by The Wall Street Journal that suggested a 500,000 barrel daily output increase was under discussion on Sunday.

Speaking earlier this week, RBC Capital Markets’ Helima Croft said there was no expectation of an output increase from the upcoming OPEC+ meeting and there was a “significant chance” of deeper output cuts.

“There’s a lot of uncertainty,” Croft told CNBC’s “Squawk Box” on Tuesday. OPEC representatives “must take into account what is happening with China, as well as what is happening with Russian production.”

“My expectation right now is that OPEC will make deeper cuts if prices get closer to the 70s with Brent, but the question is how do they factor in the next day’s futures?” Croft said. “So I still think it will be captured.”

The prices of oil, which fell sharply in recent months, fell slightly on the eve of the meeting.

International Brent oil Futures in London fell 0.2% to $87.78 a barrel on Friday morning, having crossed $123 in early June. US West Texas Intermediate futuresmeanwhile, it traded at $80.95, down 0.3% from its $122 level six months ago.

“It is tempting to boldly conclude that the bottom has been found to avoid any negative surprises during the virtual OPEC+ talks on Sunday and reach a healthy compromise on the Russian oil price cap before EU sanctions start on Monday,” said Tamas Varga, an analyst at PVM Oil broker. Associates said in a note Thursday.

Varga said oil prices below $90 a barrel were “unacceptable” for OPEC, and Russia was widely expected to retaliate against signatories to the G-7 deal.

“Tense and nervous conditions will prevail in the market, but the new month should bring more joy than November,” he said.

Jeff Currie, head of global commodities at Goldman Sachs, said that OPEC ministers will have to discuss further weakening of demand in China.

“They have to deal with the fact that, hey, demand is down in China, prices are reflecting that, and are they in line with the weakness in demand?” Currie told CNBC’s Steve Sedgwick on Tuesday.

“I think it’s very likely we’ll see a cut,” he said.

Analysts of the Eurasia Group political risk consultancy said that falling oil prices increase the risk of a new OPEC+ production cut.

“Ultimately, the decision will depend on the trajectory of oil prices during the OPEC+ meeting and how much disruption there is to markets due to EU sanctions,” Eurasia Group analysts led by Raad Alkadiri said in a research note on Monday.

If Brent futures fall below $80 a barrel for a sustained period ahead of the meeting, the Eurasian Group said OPEC+ leaders could push for further output cuts to boost prices and push Brent futures to $90. grace.”