OPEC+ opens oil taps gradually as Russian war roils markets

Thursday’s decision by OPEC, allied oil-producing nations, to keep a modest rise in production despite Europe’s proposal to eliminate Russian oil from its market threatens to rob millions of people of their oil.

The alliance known as OPEC+ (which includes Russia non-member) met online and agreed to continue with its roadmap to gradually open oil taps. They also agreed to add 432,000 barrels each day in June. These increases will be used to reverse the losses made in 2020, when the pandemic was at its worst.

This cautious approach will only increase the global energy crisis. Oil and gasoline prices are expected to rise even more. Higher prices will increase inflation, which will affect people’s ability and willingness to spend money that would otherwise be used to support economic recovery.

Rystad Energy’s analysts foresee the global oil market losing 2 million barrels if the 27 member countries of the European Union approve sanctions on Russian oil. Russia’s biggest oil customer, Europe, is likely to cause a drop in production.

European officials have been informed by OPEC that the cartel will not increase production to compensate Russian oil. Some members of the cartel are already not capable of meeting their quotas.

Oil prices are up by over 40% this year. U.S., other members of International Energy Agency have held back larger increases by releasing strategic oil reserves and decreasing demand due COVID-19 lockdowns.

Russia is the world’s biggest oil exporter, with 12% of global supply. Russian exported around 3.8million barrels of oil daily to Europe before the invasion. The European Union uses it to make gasoline and diesel fuel.

Russia might try to sell crude oil to Asia countries that have not joined the boycott if the EU follows through with its plan to end imports of crude oil within six months. It might not be able find buyers for all the oil that has been displaced from Europe at attractive knockdown prices.

Asia is not served by much rail and pipeline capacity. Given the threat of sanctions, some oil may be redirected to Asia by rail and pipeline. However, this will depend on the availability oil tankers that are willing to trade with Russian crude. Companies and banks that insure tanker fleets might be reluctant to allow the sale of Russian oil.

“Higher prices may be just around the corner.” saidBjornar Tonhaugen is Rystad Energy’s head of oil market research. “The potential EU oil embargo has not been fully priced into the oil market, so higher crude oil prices can be expected in summer months if it is voted into law.”

U.S. oil prices rose 4.3% to $109.01 a barrel after Thursday’s meeting. That is 43% higher than it was at the beginning of this year. Brent crude, the international benchmark oil, rose 1.7% to $111.81/barrel.

The average gasoline price for U.S. motorists was $4.19 per g on Wednesday. That’s an increase of $1.29 compared to a year earlier. About 60% of the US pump price is due to the crude oil price.

Diesel for trucks has increased by $2.34 to $5.43 per gallon, compared to a year ago.

Europe’s drivers pay more for their fuel because they are subject to higher taxes. The average gasoline price in Germany is 1.95 Euros per liter. This is the equivalent of $7.77 a gallon. Diesel has been at 2.02 euros per liter or $8.05 per gallon.