RUSSIAN OIL PRICE CAP OR DOUBLE-EDGED SANCTIONS

FOR WESTERN PEOPLE

This agreement prohibits companies from the signatory countries from providing services allowing the maritime transport (freight, insurance, etc.) of Russian oil, unless the price of the latter is less than or equal to 60 dollars per barrel. However, the G7 countries host the main shipping and insurance companies in the world (mainly in Greece and the United Kingdom), which therefore provides them with a credible deterrent power.

The stated desire is to deprive Russia, the world's second largest exporter of crude oil, of the means to finance its war in Ukraine. The country has indeed drawn 67 billion euros from its oil sales to the EU since the start of the conflict, for an annual military budget of around 60 billion euros, recalls Phuc-Vinh Nguyen, expert in energy issues at the Jacques-Delors Institute.

The caution displayed by OPEC+

These measures taken by the developed economies are bringing the world oil market into an unprecedented situation, the consequences of which are difficult to measure. Cautious, OPEC+ decided on Sunday to stick to the status quo while saying it was ready to act quickly if necessary.

Since Monday, Russia must therefore find an outlet at 1.1 million barrels per day, to compensate for the cessation of its crude exports to the European Union.

.Caution prevailed this Sunday after the OPEC+ meeting, a few hours before the application of the embargo by European Union countries on their imports of Russian crude (some countries such as Hungary in are exempt). This is doubled by the imposition of a ceiling price per barrel of Russian crude sold on the international market, decided by the G7 countries to which Australia has joined.

The partnership formed by OPEC and a dozen other black gold exporting countries, including Russia, prefers to wait to find out how the world oil market will react and evolve. Indeed, it is an unprecedented situation, with the possible imputation of the production of one of the major players on the planet. In 2021, Russia exported 8.23 ​​million barrels per day (mb/d), or 12.3% of the volume of oil sold internationally, according to the BP Statistical Review. In October, its exports had fallen to 7.7 mb/d.

China's sluggish demand

Eventually, rumors emanating from the cartel suggesting an increase in production to compensate for the loss of Russian volumes or a decrease to compensate for a drop in prices due to sluggish demand from China will not have materialized. The members of the organization stick to the decision taken in October to reduce from November their quota of 2 mb/d, but are ready "to meet at any time and if necessary take immediate measures to deal with to the evolution of the market and to ensure its stability", indicates the press release.

For their part, the developed economies, led by the United States, want to reduce Moscow's income but also avoid soaring oil prices, which have contributed to driving up inflation for months around the world to levels that we hadn't seen since the 1970s. In theory, it makes sense. Already, Russian crude exports have fallen from 2.4 mb/d in January to 1.5 mb/d in October. For the moment, Russia has compensated for these market share losses in Europe by selling its crude at a discount to China and India. The latter, which bought only 100,000 b/d in January, imported 10 times more in October, at 1.1 mb/d. For its part, China went from 1.6 mb/d to 1.9 mb/d in October. It is unlikely that these two countries will be able to absorb from this Monday the purchase of a volume of 1.1 mb/d, estimated by the IEA. Especially since the recovery of the economy in China, the world's largest oil importer, is not expected before the end of the first half of 2023, due to the Covid-19 pandemic and its strict "zero Covid” which limits activity. Chinese demand has already fallen by 4% in 2022 compared to 2021.

European refiners must find new suppliers

However, if the Russians have a problem of outlets, the European refiners must find an alternative. If they can do this with Gulf countries and African countries, they run the significant risk of buying Russian crude through intermediaries.

The European Commission is aware of this. It has also prepared measures aimed at sanctioning countries that circumvent the European embargo. A thinly veiled threat to Turkey, suspected of having set up a circuitous route to transport Russian crude to European countries. But private intermediaries might be tempted to do so. Freightwaves, a shipping news agency, cites a report by shipping trader BRS, which states that "there are today 1,027 tankers in a 'ghost fleet' operating to transport oil from Venezuela, Iran and Russia”. More than half (503) are high tonnage ships, some of which have been sold since the invasion of Ukraine to small shipping companies,

In the meantime, what will dictate the reaction of players in the oil market will again be the price. This is obvious for OPEC+. Oil prices have lost some 8% over the past month, but they are still more than 21% higher than their levels of a year ago. On Friday, the barrel of WTI fluctuated around 80 dollars and that of Brent around 85 dollars. Without saying it formally, the equilibrium price for the cartel is around 90 dollars.

But the choice of Europeans to accept a ceiling price of 60 dollars, and not 30 dollars, should only have a limited impact. The price of Russia's best-selling quality crude, the Urals, stood at $69.45 on Friday, just 1% below its price a year ago. But Russia is already trading this crude at a discounted price to its extra-European customers, between 48 and 50 dollars, according to Argus Media, a firm specializing in commodity prices. Europeans' acceptance of a ceiling of $60 has also angered Ukrainian President Volodymyr Zelensky, for whom such a price "is completely comfortable for the budget of the terrorist state", he said. he commented on Saturday, according to the services of the presidency.

Unnecessary penalty ?

Russian Deputy Prime Minister Alexander Novak said on Sunday that the West's move constituted gross interference that contradicted free trade rules and would destabilize global energy markets by causing a supply shortage. "We will sell oil and petroleum products only to countries that will work with us on market terms, even if we have to cut production a bit," he added.

The Kremlin has warned that it will no longer deliver oil to countries that support the mechanism, a position reaffirmed on Sunday by Russian Deputy Prime Minister in charge of Energy, Alexander Novak.

This puts some nations “in a very uncomfortable position: choosing between losing access to cheap Russian crude or exposing themselves to sanctions”, explains Craig Erlam, analyst at Oanda, a site specializing in asset trading. What, also, for Greek shipowners and British insurance companies in particular, to lose markets to the benefit of new competitors who do not submit to restrictive measures. Insurers or carriers could emerge elsewhere.

We find the same risk, particularly in the insurance sector, the development of a maritime freight activity being, by nature, “longer”. The negative effect would then be twofold for the G7 countries: not only would their companies lose markets, but the effect of the sanctions would be mitigated.

Quoted by the Russian press agencies, Alexandre Novak. even claimed that Russia was working “on mechanisms to prohibit the use of the capping tool, whatever the level set”, which is likened by several members of OPEC + to a manipulation of the prices of the oil. barrel.

Moscow also has the option of refusing to sell refined products (gasoline, diesel, diesel, etc.) to European countries, whose embargo will not officially apply until February 5, which could cause a spike in prices of these products already energized.

Since the beginning of his offensive in Ukraine, Vladimir Putin has claimed that the United States and its allies have been waging an economic war against Russia by applying the toughest sanctions in modern history.

Russia may still have enough tankers to ship most of its oil without Western restrictions, industry players and a U.S. official told Reuters in October, pointing to the plan's limitations. Western countries, yet the most successful in limiting Moscow's war revenues.