Predicting Russia’s next move against the oil price cap | oilprice.com

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On December 27, 2022, Russian President Vladimir Putin signed a decree on countermeasures against the introduction of a price cap on Russian oil and oil products. These are in response to the G7 agreement on a cap of US$60 per barrel for Russian offshore oil. The decree prohibits the sale of oil and petroleum products if the sales contract is based on a ceiling price for Russian oil, although the decree allows Putin the right to make exceptions to the application of this rule. The ban will take effect from February 1, 2023 and will apply “to shipments of Russian oil to foreign legal or natural persons under any contract that provides, directly or indirectly, for any application of the price cap mechanism.” . The ban related to the sale of Russian petroleum products uses the same terminology and will take effect on a date determined by the Russian government, but not before February 1, 2023. The current price of oil influences this supply risk scenario. to varying degrees, but is any significant price adjustment for that really justified? As with all matters relating to the world oil market, there are two basic versions of ‘reality’ to consider: the official version and the unofficial version: spoiler alert: people who have a lot to lose or a lot to win often lie. Officially, some supply risk pricing attached to the aforementioned ban and Russia’s reaction seem justified. Russia’s Deputy Prime Minister Alexander Novak himself said on December 23, 2022 that Russia’s oil production could fall by 5-7 percent due to G7 sanctions on the sector following Russia’s invasion of Ukraine in February 2022. OPEC expects Russia’s liquid production to increase will decline by 850 billion barrels per day (bpd), to an average of 10.1 million bpd in 2023. The International Energy Agency (IEA) forecasts that Russian production will fall by 1.4 million bpd in the period.

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The unofficial version is that there is no reason to expect a significant drop in Russian oil or oil product production in 2023 for a number of reasons. One of the main ones is that Russia continues to make a lot of money on every barrel of oil it produces, whether it is selling at a discount to the benchmark or not, and therefore it is in its interest to keep production at business-as-usual level. Ukraine’s pre-war levels to maximize its government revenue. For a long time, Russia had a budget break-even price per barrel of Brent oil equivalent of around US$40, about the same as the top US shale oil producers, and this figure is still correct. With the

A cap of US$60bp has been set, this is a very healthy gain.

It is appropriate to note here that the discount of 30 percent or so demanded by some of the major buyers since the Ukrainian War began, most notably China and India, is a discount from the market price of oil, not from the ceiling price. So with Brent currently around $80 bp, Russia is getting around $56 a barrel of oil from these buyers, which is still a healthy profit. Ironically, as astute readers of this website will have immediately guessed, the G7 price cap is higher than the current market price minus the deep discount at which Russian oil is sold to other buyers around the world.

Another element to take into account in the unofficial reality of the global oil supply and demand mix is ​​that Russia can still circumvent any price cap or sanctions that the G7 or any other group cares to implement through the large amount of mechanisms to avoid sanctions implemented. by Iran since it was subjected to various sanctions in 1979. As discussed in depth in my previous book on world oil markets, getting more oil to Europe at better prices than the price cap allows would not be a problem for Russia using the basic shipping-related sanctions method of simply disabling, literally just flipping a switch, on the ‘identification system’ automatic’ on ships carrying Russian oil. Simply lying about destinations on shipping papers is another tried and trusted method, as former Iranian Oil Minister Bijan Zanganeh bragged when he said in 2020: “What we export is not in Iran’s name. Documents are changed over and over again, as well as [the] Specifications.”

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For oil entering Europe, Iran used this method repeatedly and successfully. The method was initially to ship cargoes of crude oil to some of the less closely policed ​​ports in southern Europe that are in need of oil and/or oil trade commissions, including those in Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia. From there, the oil easily moved to Europe’s biggest oil consumers, including via Turkey. For Asia-bound shipments, reliable methodology for Iran-sanctioned oil, also available for Russian oil, has involved Malaysia (and to a lesser degree Indonesia) in shipping oil exports to China, with tankers with final destination to China by participating in operations at sea or abroad. transfers just outside the port of Iranian oil to tankers flying other flags.

So how many ships does Russia have access to to move its oil like that? Several high-level sources in the oil industry in the US and EU energy security spheres, spoken exclusively by oilprice.com in recent weeks, he believes that Russia could in a very short time secure at least three-quarters of the shipment needed to move its oil as usual to established buyers, and up to 90 percent within a few weeks after that. Before the invasion of Ukraine, according to IEA figures, Russia exported about 2.7 million barrels per day (bpd) of crude to Europe, and another 1.5 million bpd of petroleum products, mostly diesel. .

More broadly, as of the end of January 2022, also according to the IEA, Russia’s total world oil exports were 7.8 million bpd, two-thirds of which were crude and condensate. Therefore, using the above probable scenario range, world oil markets would only lose between 0.78 million bpd and 1.95 million bpd of Russian oil levels prior to the invasion of Ukraine, even with the cap established, regardless of all other factors. However, even this amount of supply loss is extremely unlikely, as Iran has a huge tanker fleet, some of which could be made available to Russia, as do China, Hong Kong, and India, among others. The commonly cited ‘problem’ of shipping and cargo protection and indemnity insurance is also bogus, as such insurance could quite easily be covered in all of the mentioned countries, as it was when the penalties related to shipping insurance were imposed on Iranian tanker fleets by the US

So why is Putin firing rounds of verbal warning about the $60 price ceiling? It seems quite clear that he is doing it so that no one can think of lowering the cap price to the originally discussed levels of between $20 and $30 per barrel of Brent equivalent, which would put Russian oil sales at a loss. The bottom line is that Putin and Russia’s oil companies are perfectly content with having an oil price cap of $60 per barrel of Brent equivalent. So are all buyers who can get Russian oil at this level.

Furthermore, the US is perfectly content that India, one of the two largest buyers of Russian oil since February 2022, will continue to do so, even at prices above the G7-imposed price cap mechanism if necessary, according to the comments by US Treasury Secretary Janet Yellen in November 2022. After all, it is in the US and its developed market allies that much lower oil and gas prices are in the interest of easing their upward pressure on inflation and interest rates and ease fears of recessions in those countries. Oil traders can also make as much money shorting oil and gas as they can buying it, so they are just as happy. The only people who don’t like it are the oil companies, even though they still make huge profits around these price levels.

By Simon Watkins for Oilprice.com

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