Tough new sanctions on Russian oil could change the OPEC+ dynamic

OPEC+ is expected to stick to its current production agreement for now, but behind the scenes the oil producing nations could be planning for the day when Russia’s contribution to world oil supply could be far reduced.

The European Union’s plan to ban most Russian oil and put new sanctions on shipping insurance could seriously hamper Russia’s ability to export crude. The EU leaders agreed this week to an embargo on oil and petroleum products but would allow a temporary exemption for some oil delivered by pipeline.

“If they prohibit insurance on tankers carrying Russian oil, that will really aggravate the scramble for barrels, and certainly it’s going to be a turbulent summer,” said Daniel Yergin, vice chairman S&P Global. “If you don’t have insurance, most reputable tankers aren’t going to sail because the risks are enormous.”

Most tanker insurance is written by London-based insurers. “Insurance doesn’t get the same attention as barrels of oil, but insurance is significant,” Yergin said.

That prospect of a larger loss of Russian oil from the market and the potential for sharply higher and volatile prices hangs over the members of OPEC, which have been asked by Western nations to supply more crude.

Ultimately, OPEC could increase the amount of oil in the market, as Russian oil is reduced but that is not likely to be part of any OPEC communication Thursday.

“I think they’re going to try to manage it elegantly with the Russians,” said Helima Croft, head of global commodities strategy at RBC. “I do not think the OPEC leadership is looking to humiliate Russia right now. I think they’re looking to thread the needle slowly. They are committed to the market and looking to get a reset with the United States.”

Croft said with only four months left in their current agreement, OPEC+ is expected to return the expected 432,000 barrels a day to the market at Thursday’s meeting.

She said even if OPEC were to change its agreement sooner, it’s not clear how much relief would be provided, with spare capacity limited and no end in sight for the war in Ukraine.

The strategist said, however, there is potential for Saudi Arabia to “sunset” the agreement before the official date as part of a “grand bargain” with the U.S.

Relations between the kingdom and President Joe Biden’s White House have been frayed. There is a chance Biden could visit the country and meet Crown Prince Mohammed bin Salman when the president visits Israel in late June.

“It has been our view since February that there is a deal to be had if Washington can satisfy the Kingdom’s core security and strategic concerns,” Croft noted. “During our visits to the Kingdom this year, officials there indicated they were looking for a new partnership agreement with the United States and that energy would be one part of this broader bilateral…