oil prices expecetd to be volatile

Oil prices have been quite volatile this year and more turbulence seems ahead as Western nations consider a price cap on Russian oil exports. The OPEC+ meeting is also scheduled for early next month when the cartel would decide on production targets.

The discussions on a price cap on Russian oil exports have been ongoing for quite some time now. However, there is a sense of urgency now and the Wall Street Journal reported that a decision could be reached as soon as today.

There is no unanimity on the price cap among the NATO allies. While countries like Poland and Lithuania favor a lower price cap at the marginal production cost which Poland says is around $20 per barrel, others want a higher cap of around $60 per barrel.

Notably, while the West imposed crippling sanctions on Russia for invading Ukraine, it largely left the energy exports untouched given its implications for global oil prices. Countries like China and India increased oil imports from Russia as the country offered hefty discounts.

Western Allies Are Considering a Price Cap on Russian Oil

As for the price cap on Russian oil, as expected Ukraine wants to it be set as lower as possible. Oleg Ustenko, an economic adviser to Ukrainian President Volodymyr Zelensky, said, “If you are introducing the price cap at $60, $65, that sounds reasonable from the point of view of our allies. But from our point of view, as I said before, we would like to see the possible minimum, which is the marginal production cost.”

Notably, the idea behind a price cap on Russian oil is to limit the windfall profit for Russian energy companies. Many argue that Russian energy exports fund its invasion of Ukraine by supporting the state finances which have otherwise been battered by the sanctions and a slowing economy.

Mnuchin Believes Russian Oil Price Cap is a Ridiculous Idea

Meanwhile, not everyone agrees that capping Russian oil exports is a wise idea. Steve Mnuchin, who was the Treasury Secretary in the Trump administration has called it a “ridiculous” idea.

He said, “But look, a price cap, the market is going to set the price. So, if you put sanctions on at higher prices, in a way you’re just making the situation worse.” Mnuchin said that sanctions would have made sense before Russia started the war.

He added, “Sanctions would have had a big impact back then. I think the problem now is that there’s limited options … there’s parts of the world that are now buying Russian oil outside of U.S. sanctions.”

He also lamented the fact that the US hasn’t increased its production much while calling upon OPEC+ to increase its output.

Notably, the Biden administration did take some measures to lower oil prices including releasing millions of barrels of oil from the SPR (Strategic Petroleum Reserves).

OPEC Meeting is Scheduled Next Month: Would It Cut or Increase Production

The OPEC+ meeting is scheduled for early next month. There were reports that the cartel is looking to announce a production increase at the meeting. However, Saudi Arabian Energy Minister Prince Abdulaziz bin Salman has denied the reports. He emphasized that the bloc does not discuss production decisions ahead of the meeting.

He also added the bloc is willing to cut production even further to balance the markets. At its October meeting, OPEC+ announced a 2 million bpd production cut amid slowing global demand.

Oil prices have come off their 2022 highs. However, Jim Cramer believes that a major buying opportunity might come next month. We have a guide on how to trade in oil.

Legendary value investor Warren Buffett has also been aggressively buying energy stocks and has invested billions of dollars into Chevron and Occidental Petroleum.

Rising COVID Cases in China and Deepening Slowdown in Europe are a Risk for Oil Prices

There has been a surge in COVID-19 cases in China which would take a toll on its oil demand. Europe’s slowdown is also deepening which would further dampen energy demand.

That said, a fall in oil prices would help tame inflation. US inflation is still quite high and the market is somewhat divided on the trajectory of inflation in 2023.

Overall, oil prices seem headed for further turbulence over the next couple of weeks as the markets digest news flow over Russia oil price cap, the OPEC+ meeting, and the economic data.

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