Embargo on russian oil imports has come into force, reinforced by the "price ceiling." Not everyone agrees these measures are effective
To what extent the restrictions will cut the excess profits of russia and how they will affect the fuel market of Ukraine
Today, December 5, the embargo comes into force imposed by the European Union on maritime supplies of crude oil from russia, which account for about 75% of all oil exports of the aggressor country. These are the toughest sanctions that Brussels has approved against moscow since February 24 to punish it for the full-scale war in Ukraine. The restrictions also include a ban for European insurance and shipping companies that dominate the world market to service transactions related to the international shipping of russian oil.
The global nature of the EU decision threatens to remove russian volumes from the market and provoke a jump in oil prices. In order to avoid such a scenario, as well as to reduce the kremlin's revenues from energy exports, the United States proposed Western allies to impose price limitations on russian oil. Last Friday, the EU, G7 and Australia (the so-called Price Cap Coalition) agreed a $60 per barrel limit.
This limit will be reviewed every two months taking into account the market situation and will be at least 5% lower than the average market price of russian oil, calculated on the basis of the International Energy Agency data. The coalition has also provided for a special "emergency provision" that allows oil to be transported above the ceiling price in the event of a natural disaster.
Mind examined what changes and risks the global oil market should expect due to the embargo on russian oil and whether Ukraine being completely dependent on foreign supplies should prepare for a fuel shortage.
What is the "price ceiling" and why is it needed? The price cap will apply to Russian crude oil exports excluding insurance and delivery costs. The vast majority of political and industry estimates are that the $60 limit is not strict enough for the budget of russia, which has been recognised as a sponsor of terrorism.
In particular, this is the opinion of President of Ukraine Volodymyr Zelensky. "russia has already caused enormous losses to all countries of the world by deliberately destabilising the energy market. And the world cannot decide on its real energy disarmament. This is a weak position... If the price of russian oil is limited to $60 instead of, for example, $30, which was discussed, in particular, by Poland and the Baltic states, the Rrussian budget will receive about $100 billion a year. This money will be spent not only on the war... This money will be spent on further destabilisation of those countries that are trying to avoid serious decisions," the President of Ukraine said.
How will the "price ceiling" work? Self-sanctions of market players, their unwillingness to trade russian volumes means that russia has already been forced to reduce its oil prices. Before Rrussia's invasion of Ukraine on February 24, the Urals discount to the global benchmark Brent averaged about $2.80 per barrel, in the summer the discounts exceeded a record $40, and recently have been holding at around $33 per barrel.
How exhaustive are these restrictions? Calculations by consulting companies confirm that the price limit proposed by the West looks toothless.
On December 1, Platts estimated Urals at $55.79 per barrel. That is, the limit of $60 per barrel exceeds the current prices of Urals, and there are reasons for Russia to continue to receive significant profits from oil exports, and the world market remained well supplied.
How did russia react to them? Russia's reaction to the limit is not unambiguous. They threaten to refuse to sell oil to the countries that supported price restrictions, and then talk about the need to "take a break" to determine further actions. "Let's see how it will go. There are uncertainties, but, meanwhile, our oil is in demand on world markets. And we believe that the demand for it will continue", said Alexander Novak, Minister of Energy of the russian federation.
How did traders respond? They doubt that russia will block oil exports in any case. This, in particular, is evidenced by the decline in quotations by almost 2 percentage points after the announcement of the price limit by the Western coalition last Friday.
OPEC+ countries, which are the main suppliers of oil on the world market, prefer to cautiously assess the course of events. On Sunday, at a regular meeting, they decided not to change the policy and leave production at the 2 million barrels per day level (approved in October).
In a statement released after the virtual meeting, which was held without hype and lasted about 30 minutes, the cartel noted that it will continue to closely monitor the market, and the monitoring committee can convene an emergency meeting of OPEC+ at any time to discuss possible changes in production.
The alliance drew attention to the fact that the market is currently agitated by uncertainty about the demand of China, which is the world's largest oil importer, and russian supply due to Western sanctions and price restrictions.
Why may oil demand decline? There are other reasons for the global decline in demand. In particular, this is indicated by the plans of Saudi Arabia – the leader of the OPEC, to reduce official selling prices. And the state energy company of Kuwait said that its customers do not want to increase oil imports next year – this is a sign that consumption is depressed by the weakness of the global economy.
"Oil markets are likely to remain volatile in the short run," said Giovanni Staunovo, an analyst at UBS (Zurich).
The main factor of volatility is the inability to predict how Western restrictions on russian oil and oil products will work in the future. Contrary to skeptical expert estimates, the United States and the United Kingdom are determined to strengthen control over the implementation of sanctions by market players.
Who else needs russian oil? Russian maritime exports of crude oil and petroleum products have remained steady in recent months, despite new Western sanctions and price restrictions. According to S&P Global Commodities, in October, oil sales amounted to 3.09 million barrels per day, slightly below the 3.1 million barrels in January and February of this year, when russia had not yet gone to war with Ukraine.
China, India and Turkey continue to buy russian oil that is being displaced from Europe and the United States.
Although these Asian countries refuse to support Western embargoes and price restrictions, sanctions allow them to receive significant discounts from russian suppliers. And the oil products produced by refineries in China and India from raw materials from russia, save Western markets from shortages, and even at reasonable prices.
Therefore, it is not surprising that the members of the Price Cap Coalition call on third countries to use the price cap on oil of russian origin. "We point out that this is in the economic interests of these countries, as imports at capped prices will help to reduce energy prices and limit russia's ability to further profit from the premium it earned during the war," the statement said.
How will the embargo affect the European and Ukrainian fuel market? From today, the EU market is likely to experience unpredictable fluctuations and events provoked by russia's reaction to the beginning of the oil embargo. "We are waiting for two to three months of turbulence until the European market adapts first to oil and then to petroleum product sanctions (to take effect in February 2023. – Mind)," Sergiy Kuyun from A-95 Consulting Company predicts.
According to him, a snapshot of the current situation on the main directions of fuel supply to Ukraine allows us to conclude that Ukrainian consumers "felt the first" the tightening of anti-russian sanctions. When preparing for the embargo, our traditional suppliers have limited or completely stopped exports.
"We just have to go through this period, as Ukraine went through a much more difficult stage of market restructuring in the spring. Because we had to replace 100% of the pre-war sources of supply, and Europe has to find "only" 40%", – said Sergiy Kuyun.
He also advises "not to rush to hate our allies for the $60 'ceiling' for russian oil". Because "the question is not in the price, but in the fact that there is no scarcity," that will lead to " stratospheric prices." And Ukrainian suppliers have " all possibilities" to deliver petroleum products. The main thing is to have something to be delivered to Ukraine.
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