Predicting Russia’s Next Move Against Oil Price Ceiling | OilPrice.com

On December 27, 2022, Russian President Vladimir Putin signed a countermeasure decree against the introduction of a price ceiling on Russian oil and oil products. These are in response to G7 deal at $60 per barrel for Russian marine oil. The decree prohibits the sale of oil and oil products if the purchase contract is based on a price ceiling for Russian oil, although the decree gives Putin the right to grant exemptions from the application of this rule. The ban will come into effect on February 1, 2023 and will apply “to the supply of Russian oil to foreign legal or natural persons under any contracts that directly or indirectly foresee any use of the price ceiling mechanism.” The ban on the sale of Russian oil products uses the same terminology and will take effect on a date set by the Russian government, but no earlier than February 1, 2023. The current price of oil in this scenario affects supply risks to varying degrees, but any meaningful price adjustment is worth it really justified? As with all matters concerning the global oil market, there are two basic versions of “reality” to consider: the official version and the unofficial version: spoiler alert – people with a lot to lose or a lot to gain often lie. Officially, some pricing of the supply risk associated with the aforementioned ban and Russia’s response to it would seem justified. On December 23, 2022, Russian Deputy Prime Minister Alexander Novak said that Russian oil production may fall by 5-7 percent due to G7 sanctions on the sector due to Russia’s invasion of Ukraine in February 2022. OPEC expects Russian liquids production to fall by 850,000 million barrels per day (bpd), to an average of 10.1 million barrels per day in 2023. The International Energy Agency (IEA) predicts that Russian production will fall by 1.4 million barrels per day during this period.

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The anecdotal version is that there is no reason to expect any significant decline in the production of Russian oil or oil products in 2023 for several reasons. A key one is that Russia still makes a lot of money from every barrel of oil it produces, whether it’s sold at a discount to the benchmark or not, so it’s in its interest to keep production at its usual level. before the war in Ukraine to maximize his government revenue. For a very long time, Russia had a budget price per barrel of Brent oil equivalent of around $40, about the same as the top US shale oil producers, and that number is still about right. with

$60 pb cap in place, that’s a very healthy profit.

It is worth noting here that the roughly 30 percent discount demanded by some major buyers since the beginning of the war in Ukraine – notably China and India – is a discount from the market price of oil, not a price cap. Therefore, with Brent currently around $80 pb, Russia is getting around $56 per barrel of its oil from these buyers, which is still a healthy profit. Ironically, astute readers of this site immediately deduced that the G7 price ceiling is higher than the current market price minus the significant discount at which Russian oil is sold to some other buyers around the world.

Another element to consider in the anecdotal reality of the global oil supply and demand mix is ​​that Russia can still circumvent any price caps or sanctions that the G7 or any other group chooses to impose through a myriad of sanctions avoidance mechanisms . Iran because it was subject to various sanctions in 1979. As analyzed in detail in my previous book on global oil markets, getting more oil into Europe at better prices than the price cap allows would be no problem for Russia, as it would use the basic method of cascading shipping-related sanctions, which consists of deactivating—literally by simply flicking a switch—the “automatic identification system” on ships transporting Russian oil. Simply lying about destinations in shipping documents is another proven method, as former Iranian oil minister Bijan Zanganeh boasted in 2020, “What we export is not under the name of Iran. Documents change over and over again [the] Specifications.”

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Iran has repeatedly and successfully used this method for oil going to Europe. The method initially involved shipping oil cargoes to some of the less heavily guarded southern European ports that need commissions for oil and/or oil trading, including ports in Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia. From there, the oil easily reached the larger European oil consumers, including Turkey. For Asia-bound shipments, the reliable methodology for sanctioned Iranian oil, also available for Russian oil, involved Malaysia (and to a lesser extent Indonesia) in shipping oil to China, with tankers ultimately bound for China engaging in maritime or transfers of Iranian oil to tankers flying other flags directly from the port.

So how many ships does Russia have access to transport oil in such a way? Several senior US and European Union energy security oil industry sources spoke exclusively to OilPrice.com in recent weeks, they believe that Russia could provide at least three-quarters of the shipping needed to move oil as usual to established buyers very quickly, and up to 90 percent within weeks after that. Before the invasion of Ukraine, Russia exported around 2.7 million barrels per day (bpd) of crude oil and another 1.5 million bpd of petroleum products, mostly diesel, to Europe, according to the IEA.

More generally, by the end of January 2022, also according to the IEA, Russia’s total oil exports to the world totaled 7.8 million barrels per day, two-thirds of which were crude and condensate. Therefore, using the above range of likely scenarios, global oil markets would lose only 0.78 million bpd to 1.95 million bpd of Russian oil levels prior to the Ukrainian invasion, even with the cap in place, net of all other factors. However, even this loss of supplies is extremely unlikely, as Iran has a huge fleet of tankers, part of which could be made available to Russia, as well as China and Hong Kong and India, among others. The oft-cited “problem” with shipping and cargo protection and liability insurance is also bogus, as such insurance could easily be paid for by all of the countries mentioned, as was the case when such shipping insurance-related sanctions were imposed on Iran’s oil tanker fleets. OUR

So why is Putin firing verbal warning volleys about a $60 price cap? It seems clear enough that he is doing this so that no one gets into the head of lowering the price ceiling to the level originally contemplated – between $20-$30 per barrel of Brent equivalent – ​​which would put a strain on Russian oil sales. loss. The bottom line is that Putin and Russian oil companies are perfectly happy with an oil price ceiling of $60 per barrel of Brent equivalent. So are all the buyers who can get Russian oil at this level.

Moreover, the US is perfectly happy that India – one of the top two buyers of Russian oil from February 2022 – will continue to do so, even at prices higher than the G7 price cap mechanism, if necessary, according to the minister’s comments US finance. Janet Yellen in November 2022. After all, it suits the US and its developed market allies to have much lower oil and gas prices to ease their upward pressure on inflation and interest rates and ease fears of a recession in those countries. Oil traders can also make as much money short selling oil and gas as they can buying it, so they’re just as happy. The only people who are not comfortable with this are the oil companies, even though they are still hugely profitable around these price levels.

Simon Watkins for Oilprice.com

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