A complete turnaround in oil – Russia made a surprise choice

A complete turnaround took place in the oil market. Back in the spring, there were fears of extremely high prices and a crisis due to the war in the Middle East. Now the price of oil has collapsed from its peak during the war, and the threat is oversupply.

Thanks to the agreement of intent reached by the United States and Iran, oil tankers will once again pass through the Strait of Hormuz, at least for the time being.

The market has invented new routes for oil. The United States has used its emergency reserves. China has limited its purchases.

Over the weekend, the downward pressure was increased by the Opec+ organization of oil producing countries, which agreed to increase daily production quotas for August by 188,000 barrels. The actual increase depends on the development of the situation and remains to be seen.

Within the OPEC organization, there has been a dispute over production restrictions that have been in effect for years. The United Arab Emirates left the organization in May after becoming frustrated with the strict limits. Iraq has also threatened to leave the group for the same reason.

Russia has been considered to have benefited from the slowdown in traffic in the Strait of Hormuz and the rise in oil prices. Now that the Strait of Hormuz is doing better again and the price of oil is falling, together with Saudi Arabia, Russia, which leads Opecia, is deciding on production increases.

The superficially contradictory situation is explained by the fact that if Opec maintains too strict restrictions, it can encourage competitors to increase production. This, in turn, could lead to Opec countries losing their market share.

Russia does not make decisions alone in OPEC, which are always the sum of many variables, but the issue can also be looked at from Russia’s point of view.

Roughly speaking, Russia has two options: either keep production down and risk its own market share, or accept a lower price and try to maintain its position. Russia seems to have chosen the latter strategy.

Due to Western sanctions, Russia often sells its oil at a discount. Russia’s total income may not decrease as much as the change in the world market price would suggest. In addition, Russia needs continuous cash flow more than momentary price spikes.

Russian crude oil exports have increased according to the news company Bloomberg to a record high. Ukraine’s drone attacks have put a strain on Russian refineries, which has potentially diverted Russian crude oil abroad that would normally have been refined domestically.

An interesting question is also when China will return to full-scale purchases.

The geopolitical situation is uncertain, but American banks are already daring to predict that oil prices may fall further in the second half of the year. For example Citi estimates that a return to $60 a barrel prices is possible at the end of the year. The price of Brent crude oil per barrel was around 72 dollars on Monday.

So far, the still very foggy outlook has changed from crisis to oversupply. If the peace process in the Middle East does not explode, there is a cover for predictions that prices will continue to fall.