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Explained| Will OPEC+ raise output amid soaring prices with EU’s ban on Russian oil?

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There seems to be no end in sight to the Russia-Ukraine war which has been raging for over two months. EU’s latest sanction exacerbates inflationary pressures. Will OPEC+ infuse more oil to heal the wounds sustained by the global economy?

A day after the European Union (EU) slapped a phased embargo on Russian oil imports, the Organization of the Petroleum Exporting Countries plus (OPEC+) agreed to another modest monthly oil output increase, arguing that the producer group could not be blamed for disruptions in Russian supply. Incidentally, Russia is a member of this group.

In its May 5 meeting, the group it also said that China's coronavirus lockdowns threatened the outlook for demand. OPEC+ agreed to raise its June production target by 432,000 barrels per day (bpd), in line with its existing plan to undo the curbs enforced in 2020 when the pandemic impacted overall oil demand.

Also Read: OPEC+ sticks to modest oil output hike despite price rally

There were calls from several countries that the group, which exercises significant power to influence global oil prices, pumps in some fuel to cool down prices. OPEC+ ignored these calls. With the Russian invasion of Ukraine that resulted in supply chain disruptions and high oil prices, OPEC’s stance over its oil output has come under fire.

Analysts reckon that EU’s sixth set of sanctions against Russia - the toughest one yet as it aims, among other things, to  phase out supplies of Russian crude oil within six months, will drive energy prices further.

A day after the European Union (EU) slapped a phased embargo on Russian oil imports, the Organization of the Petroleum Exporting Countries plus (OPEC+) agreed to another modest monthly oil output increase, arguing that the producer group could not be blamed for disruptions in Russian supply. Incidentally, Russia is a member of this group.

In its May 5 meeting, the group it also said that China's coronavirus lockdowns threatened the outlook for demand. OPEC+ agreed to raise its June production target by 432,000 barrels per day (bpd), in line with its existing plan to undo the curbs enforced in 2020 when the pandemic impacted overall oil demand.

Also Read: OPEC+ sticks to modest oil output hike despite price rally

There were calls from several countries that the group, which exercises significant power to influence global oil prices, pumps in some fuel to cool down prices. OPEC+ ignored these calls. With the Russian invasion of Ukraine that resulted in supply chain disruptions and high oil prices, OPEC’s stance over its oil output has come under fire.

Analysts reckon that EU’s sixth set of sanctions against Russia - the toughest one yet as it aims, among other things, to  phase out supplies of Russian crude oil within six months, will drive energy prices further.

In March, when crude prices hit their highest since 2008 at more than $139 a barrel after Russia's invasion of Ukraine, the OPEC+ supply shortfall was a contributing factor to the record-setting mark.

Also Read: India defends Russian oil imports as EU proposes gradual ban

Way forward

The EU’s oil embargo could deprive Moscow of a major revenue stream as around half of Russia's 4.7 million barrels per day of crude exports go to the EU. The ban will likely force Russia to reroute its flows to Asia and reduce production by a huge margin while the EU will compete for the remaining available supply.

"OPEC+ continues to view this as a problem of the West’s own making and not a fundamental supply issue that it should respond to," Macpherson told Reuters.

In the absence of Russian oil, the EU is likely to face higher energy bills and a slowdown of economic activity upon insufficient and moderately priced alternatives. OPEC Secretary-General Mohammad Barkindo said that it was not possible for other producers to replace Russian exports of more than seven million bpd. "The spare capacity just does not exist,” he said.

Analysts foresee the global market potentially losing up to two million barrels within six months if all 27 EU governments agree to the proposed sanctions against Russia, besides concerns of rebuilding the global supply chain network in a short period of time.

Also Read: Europe is about to ban Russian oil: What’s next?

Supply chain makeover

‘’OPEC has failed to bridge the supply gap that we have already witnessed recently and in March too, OPEC and allies produced 1.45 mbpd below their output targets in March 2022,’’ said Sugandha Sachdeva, VP-Commodity & Currency Research, Religare Broking.

“Besides, rerouting spare capacity towards Europe would be a difficult task in a short period, after fulfilling the requirements of Asian buyers including China and India. Another concern is that rebuilding or makeover of the whole supply chain and distribution network in such a big region is not a small task, it takes years and huge capital to create a vast infrastructure,’’ she added.

In early Asian trade on Wednesday, oil edged lower, sustaining weakness that was caused by risks to demand from economic recession and on uncertainty of the embargo on Russian oil. Brent crude was last down 86 cents, or 1.1 percent, at $101.60 a barrel, while US West Texas Intermediate crude fell 80 cents, or 0.8 percent, to $98.96 a barrel.

Once the Russian oil ban and other latest sanctions roll out, the global economy is expected to witness an energy crunch which could raise the prices of refined products such as petrol, diesel, and aviation fuel. The high prices will fuel global inflation and discourage people from spending that would have otherwise supported economic recovery.

In the next and final installment of the series, read about what the EU ban on Russian crude oil imports means for India.

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