The imposition of a price cap on Russian oil – being finalized last week by senior G7 government officials in Washington – is an even trickier issue than usual in the current oil market and geopolitical circumstances. The unofficial oil price range from 40 to 75 USD per barrel of Brent crude (bp) in place for the vast majority of former US President Donald Trump’s tenure has been managed by a combination of threats (from US Army withdrawal of Saudi Arabia, and the death of “NOPEC” legislationmainly) and rewards (the security guarantee for Saudi Arabia and U.S. corporate investment in the country), as analyzed in detail in my latest oil market book. Yet Saudi Arabia was not at the time a top nuclear power in the midst of an invasion of a major European country initiated by a president who had staked everything personally on its success. Also on the economic level, the challenges linked to the former de facto The oil price range was not as complicated as it is today, with a seismic transition designed to wean Europe and other powers from cheap Russian energy, but it still took time to do so. . The world’s major economies are already dealing with the inflationary effects of high energy prices catalyzed by Russia’s invasion of Ukraine in February, with interest rate hikes hurting the economy now adding to to the negative economic pressure observed since the end of various quantitative easing measures in place since the Great Financial Crisis. So on the one hand, the last thing the major G7 economies now want is for this to be compounded by a huge drop in Russian oil and gas supplies during this transition process, but, d on the other hand, they are well aware that every extra dollar added to the price at which Russia can sell its oil and gas means it can stay longer in Ukraine and kill more Ukrainians. It also means that Russian President Vladimir Putin’s personal stakes continue to rise, which, in turn, increases the chances of a wider escalation in nuclear war as he realizes that he faces guaranteed failure in his war.
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This delicate balancing act was acknowledged by US Treasury Secretary Janet Yellen that a price cap in the range of $60 per barrel of WTI would incentivize Russia to continue producing oil and equate to around $68 per barrel of Brent given the recent history of the United States. Premium of $8 per barrel of Brent over WTI. The final price cap for oil from Russia will be decided by December 5, when a European embargo on Russian oil and associated restrictions on the transport and insurance of oil transported by sea are expected to come into force. .
Given the apparent ideological duality at play in the design of this oil price cap, it is by no means certain that it will be strictly enforced. In other words, given that the G7 does not want to stop all oil exports from Russia, but rather only limit the revenue it can extract from each barrel, the question for world oil markets remains how much oil can Russia successfully export even with the price cap in play? In general terms of the oil market, this is the key figure, as Russian oil exports that seep into the world market at prices above the oil price ceiling will affect the world supply and demand of oil, which in turn will affect prices. The answer to this question largely depends on shipping and the Russia-Iran-Iraq-China corridor.
First, there is the question of how many ships Russia can secure to transport its oil. Several high-level sources in the oil industry in the United States and in the energy security spheres of the European Union, to whom they spoke exclusively OilPrice.com last week believe Russia could get at least three-quarters of the shipments needed to get its oil as usual to established buyers in a very short time, and up to 90% a few weeks later. Prior to Ukraine’s invasion, according to IEA figures, Russia was exporting around 2.7 million barrels per day (bpd) of crude oil to Europe, and another 1.5 million bpd of products. tankers, mainly diesel. More broadly, at the end of January this year, again according to the IEA, Russia’s total world oil exports stood at 7.8 million bpd, of which two-thirds were crude and condensate. Therefore, using the likely scenario range above, global oil markets would only lose between 0.78 million bpd and 1.95 million bpd from pre-Ukrainian invasion Russian oil levels, even with the ceiling in place, regardless of all other factors. Given the huge tanker fleets operated by Russia itself, China, India and Iran, there would be no shortage of ships at its disposal, and the commonly cited “problem” of protecting ships and cargo and indemnity insurance would be fairly easily covered from all the countries mentioned, as was the case when such marine insurance sanctions were imposed on Iranian tanker fleets by the United States
Second, the Russia-Iran-Iraq-China Corridor also offers several other mechanisms for moving oil in a sanctions environment. Iran, in collusion with Russia and China, and using Iraq as a master key when necessary, has had no choice but to develop its own methods of circumventing sanctions since 1979, at which he has become so adept that it is a matter of national pride at the highest levels. In December 2018, at the Doha Forum, then Iranian Foreign Minister Mohammad Zarif said: “If there is an art that we have perfected in Iran, [that] one can teach others for a price, it is the art of escaping sanctions. Towards the end of 2020, the then Iranian Minister of Petroleum himself, Bijan Zangeneh, added a small detail to one of these proven methods: “What we export is not in the name of the Iran. The documents are changed many times, as well as [the] Features.”
As also analyzed in full in my latest oil market book, the shipping-related methods of circumventing the sanctions are quite simple, involving disabling – literally at the flick of a switch – the “automatic identification system” on ships that carry Russian oil, just like lying about destinations in shipping documents, as mentioned by Zanganeh. In Europe, Iran has used this method to move oil into some of the less tightly guarded ports in southern Europe that need oil and/or oil trading commissions, including those in Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia and Croatia. From there, the oil was easily transported to Europe’s biggest oil consumers, including via Turkey. For shipments to Asia, the reliable methodology for sanctioned Iranian oil, also available for Russian oil, would have involved Malaysia (and to a lesser extent Indonesia) in routing oil exports to the China, tankers bound for China engaged in offshore operations or transfers just outside Iran’s oil port on tankers flying other flags.
It should be noted at this point that there are several grades of Russian crude oil whose specifications are also extremely close to comparable grades in Iran, and therefore Iraq, with which Iran shares many major oil reservoirs and fields. If the G7 decided to toughen its sanctions on Russian oil exports, then Moscow and Tehran could agree a swap deal of some sort that would see Russian oil go wherever Iran gets it. need, with a compensatory amount of “Iraqi” (read “Iranian”) goes where Russia wants it, because Iraqi oil is not subject to any sanction. This basic strategy of “renaming” Iranian oil to Iraqi oil has seen huge volumes of Iranian oil flow through Iraq’s existing crude oil export infrastructure, including very large crude carriers laden with in and around the southern export center of Basra. It was also carried directly to southern Europe via the Turkish port of Ceyhan via the pipelines crossing the Iraqi semi-autonomous region of Kurdistan, although these were subject to permanent disturbances for years, and it is also planned other pipelines from Iraq to Jordan and Syria.
OilPrice.com includes sources close to Iran’s Petroleum Ministry to whom it spoke exclusively last week that there has been a “significant shift” from that longstanding agreement to demarcate crude oil flows into from Russia, Iran and Iraq – i.e. Russian oil exports had priority over Iranian/Iraqi ones to Europe – during very recent trip of the Russian Deputy Prime Minister, Alexander Novak. “The basis for a new agreement regarding crude oil flows from ‘Russia/Iran/Iraq had been laid at the January meeting. [2022] meetings [in Moscow, when Iranian President, Ebrahim Raisi – the first visit of an Iranian president to Russia in almost five years at that point]and these have been discussed in greater detail over the past two weeks,” the source told OilPrice.com.
By Simon Watkins for Oilprice.com
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