How does Russia react to the Western price cap?

What is the situation of Russian oil and its supplies after the imposition of the price cap? We have to look at the problem from the official and formal point of view and from the practical point of view. Officially, a certain assessment of the supply risk linked to the aforementioned ban and Russia's reaction would seem to be justified . Russian Deputy Prime Minister Alexander Novak said on 23 December 2022 that Russian oil production could decline by 5-7% due to the G7 sanctions imposed on the sector following the Russian invasion of Ukraine in February 2022. L OPEC expects Russian production of liquids to decline by 850,000 million barrels per day (bpd), to an average of 10.1 million bpd in 2023. The International Energy Agency (IEA) expects Russian production it will drop by 1.4 million bpd over the period.

The unofficial, realistic version is quite different: there is no reason to expect a significant drop in Russian production of oil or petroleum products in 2023 for several reasons. One of them is that Russia still earns a lot from every barrel of oil it produces, whether it is sold at a discount to the benchmark or not, and consequently it is in its best interest to keep production at its usual pre-war levels in Ukraine to maximize government revenue. For a long time, Russia had a breakeven price per barrel of Brent oil equivalent of around $40, roughly the same as top US shale producers, and this figure is still correct. Capped at $60 a barrel, that's still a healthy profit. Why should Russian companies give up substantial profits?

It should be noted that the roughly 30% discount sought by some large buyers since the start of the war in Ukraine – particularly China and India – is a discount on the market price of oil, not the maximum price. So, with Brent currently around $80 a barrel, Russia is receiving around $56 a barrel from these buyers, which is still a nice profit. Ironically, as astute readers of this site will have immediately deduced, the G7 price cap is higher than the current market price, minus the steep discount at which Russian oil is being sold to some other buyers around the world.

Another element to consider in the unofficial reality of the global oil supply/demand mix is ​​that Russia can still circumvent any price ceiling or sanctions that the G7 or any other group wants to put in place through the myriad of sanctions avoidance mechanisms implemented by Iran since it was subjected to various sanctions in 1979 . As detailed in my previous book on global oil markets, getting more oil to Europe at better-than-cap prices would be no problem for Russia, using the basic method of evading shipment sanctions: just turn off – literally, just flip a switch – the “automatic identification system” of Russian oil-carrying vessels. Simply lying about destinations in shipping documentation is another tried and trusted method, as former Iranian Oil Minister Bijan Zanganeh boasted when he said in 2020: “What we export is not in Iran's name. The documents are constantly changed, as are the specifications”.

For oil destined for Europe, Iran has used this method repeatedly and successfully. The method initially involved shipping cargoes of crude oil to some of the less strictly controlled Southern European ports in need of oil and/or oil trade fees, including those in Albania, Montenegro, Bosnia and Herzegovina, Serbia , Macedonia and Croatia. From there, the oil was easily transported to major European oil consumers, including via Turkey. Concerning shipments to Asia, the reliable methodology for sanctioned Iranian oil, which is also available for Russian oil, involved Malaysia (and to a lesser extent Indonesia) in forwarding oil exports to China, with tankers ultimately bound for China making transfers at sea or just outside the Iranian oil port to tankers flying under other flags.

So, how many ships does Russia have access to to move its oil like this? Several senior sources from the US oil industry and the European Union, interviewed exclusively by OilPrice.com in recent weeks, believe that Russia could very soon secure at least three-quarters of the shipping needed to transfer its oil, as usual , to established buyers, and up to 90% within a few weeks. Before the invasion of Ukraine, according to IEA data, Russia was exporting about 2.7 million barrels per day (bpd) of crude oil to Europe and another 1.5 million bpd of petroleum products, mostly diesel.

More broadly, Russia's global oil exports amounted to 7.8 million bpd at the end of January 2022, two-thirds of which consisted of crude oil and condensates, according to the IEA. Therefore, using the above range of likely scenarios, global oil markets would only lose between 0.78 million bpd and 1.95 million bpd of pre-invasion Russian oil levels of Ukraine, even with the cap in vigor, regardless of all other factors. However, even this loss of supply is extremely unlikely, as Iran has a huge fleet of tankers, parts of which could be made available to Russia, as do China and Hong Kong and India, among others. other. The commonly cited “problem” of shipping and cargo protection and indemnification insurance is also only partial, as such insurance may be sufficiently covered by countries that do not enforce sanctions, as was the case when related sanctions shipping insurance has been imposed by the United States on Iranian tanker fleets.

So why is Putin issuing verbal warnings about the $60 price ceiling? It seems quite clear that he is doing this to prevent anyone from lowering the price ceiling to the levels initially assumed – between 20 and 30 dollars per barrel of Brent equivalent – ​​which would put Russian oil sales at a loss. Ultimately, Putin and the Russian oil companies are perfectly content with having an oil price ceiling of $60 per barrel of Brent equivalent. As well as any buyers who can buy Russian oil at this level.

Furthermore, the US is fully in agreement 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 needed, according to the comments. by US Treasury Secretary Janet Yellen in November 2022. After all, the US and its developed-market allies need much lower oil and gas prices to ease upward pressure on inflation and interest rates. interest and to ease fears of recession in those countries. Oil traders can also make as much money by selling oil and gas short as by buying it cheaper. The only ones not satisfied are the oil companies, although they are still in big profits at these price levels.

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The article How does Russia react to the Western price cap? comes from Economic Scenarios .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/come-la-russia-reagisce-al-tetto-al-prezzo-occidentale/ on Tue, 10 Jan 2023 09:19:58 +0000.