Home Commodities Time is running out on the Russian oil price ceiling

Time is running out on the Russian oil price ceiling

by SuperiorInvest

This article is a version of our Energy Source newsletter. Register here to receive the newsletter every Tuesday and Thursday directly to your email inbox

Good morning from London. With our American colleagues teaming up with the odd but much-loved tradition of doing a giftless Christmas a month before the actual Christmas, the UK energy team put on a show.

If you need a break from all the giving thanks, consider Source Energy your refuge.

No one will try to make you a second slice of pumpkin pie. Sweet potatoes will remain unmolested by marshmallows as long as the UK has a say. And the only mention of Planes, trains and automobiles it will be in the context of the oil they consume.

So without further ado, let’s (thankfully) get down to it. — David

Beware of the price ceiling

After months of deliberation, the G7 (plus Australia) is close to announcing where its much-vaunted price cap on Russian oil supplies will sit.

Since it was first introduced this summer, the dual goals of the price cap plan have been fairly clear: to reduce the income flowing to Vladimir Putin’s Russia over the course of wages. war in Ukrainebut perhaps more importantly (depending on which policymaker you ask), ensuring that Russian oil remains on the market.

There have been several sticking points, not the least of which is Russia’s refusal to deal with any country that signs up to the cap plan. But the G7 is determined to strike a deal before December 5, when EU sanctions banning oil imports to the bloc by sea come into effect.

An open question is at what level the ceiling will actually be set. In the next few days, EU member states are expected to decide the level they can reach together. The U.S. and U.K. have released detailed instructions on how the plan will work, including rules limiting oil that meets the price cap so it can be easily resold at higher prices.

European countries like Poland, which are more hawkish towards Russia, are likely to favor a lower price. Others are more cautious, fearing that setting the level too low could lead to Russia temporarily curbing output, causing chaos in the oil market, with Moscow already weaponizing gas supplies against Europe.

The US view is that it doesn’t matter whether Russia signs the plan or not.

While this stance is likely moving the goalpost a bit, it is based on the belief that so-called third countries like India and China, which are likely to continue buying Russian oil, will still be able to use the price cap to negotiate cheaper oil. offers.

The hope is that Russian barrels flow, benchmark oil prices won’t overreact and threaten the global economy, and Russian revenues are falling as India and China push for a tough deal.

It’s a neat-sounding idea, but as many marketers have pointed out, it’s yet to be tested in the real world.

Moscow will be motivated to participate in the scheme because failure to do so will allow G7 countries to effectively bar tankers seeking to transport Russian oil from access to all kinds of maritime services from insurance to shipbrokers.

In particular, without insurance – and the UK is on board with denying access to the key Lloyd’s of London market – it will be difficult for Russia to gain access to enough vessels to keep the flow of oil exports from the sea.

Cutting exports would only be a short-term option unless Russia wants to stop production and risk long-term damage to its oil fields, the argument goes.

Vitol, the world’s largest independent oil trader, forecasts that while Russia has bought some old tankers to help get its oil to market independently, volumes could still fall by about 1 million bpd early in the new year.

However, there is pressure to ease some of the shipping restrictions. Tankers carrying Russian oil outside the price cap can only be barred from accessing Western shipping services for 90 days, not indefinitely. This is likely to please Greek shippers, who have made good money shipping Russian oil since the invasion, as well as those who prefer keeping Russian oil flowing over cutting Putin’s income.

The latter has arguably become less important as oil prices have fallen from around $120 a barrel in June to $85 a barrel today in benchmark Brent. Russia’s main export grade, Urals, is off another $20 a barrel due to market forces alone as European buyers turn away.

If oil prices continue to fall, there is some suspicion that the cap may be introduced around where Russian oil is already trading.

But the impact will still be one that the oil market will watch closely when the sanctions kick in on December 5, one day after the next Opec+ meeting. A lot of news awaits us.

Data drill

Okay, maybe I told a white lie. Before you rejoin the family, here’s a special exercise with Thanksgiving dates.

In the only Thanksgiving movie that ever made it overseas—the above Planes, trains and automobiles — Steve Martin is trying to drive back from Wichita, Kansas to his family in the North Shore suburbs of Chicago after bad weather diverted his flight back from New York. Enter John Candy. The hilarity ensues.

But how much would that trip cost today compared to 1987, when the movie was released?

In 1987, the average price of a gallon of gasoline in the US was 90 cents, according to the US Energy Information Administration. That’s about $2.06 per gallon after adjusting for inflation.

Today, the average price of gasoline in the U.S. is $3.61, according to AAA, about 75 percent higher, even if it doesn’t take into account the cost of cigarettes you used to smoke more then.

The average American car is also more efficient today—getting roughly 35 miles per gallon today versus 25 miles per gallon in the 1980s.

The fixed point of the calculation is the distance of 720 miles from the airport in Wichita, Kansas to Kenilworth, Illinois.

Result?

In 1987, Martin would have faced an inflation-adjusted gas bill of $59 to get home in time for Turkey Day, if he actually managed to drive, of course. Today? Closer to $74. But the heartwarming lessons of Thanksgiving? Still priceless.

Happy Holidays.

Power Points

  • The gas price ceiling proposed by the EU has been marked “joke without a hat” after coming under fire from critics who say it will likely never be used.

  • Bloomberg oil strategist Julian Lee writes about the largest importer of Russian oil which does not have a backup plan for sanctions on the country’s oil.

Energy Source is a bi-weekly energy newsletter from the Financial Times. Writes and edits Derek Brower, Myles McCormick, Justin Jacobs, Amanda Chu and Emily Goldberg.

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