Today’s Take: Capping Russia’s Oil Revenues
The US administration is pushing ahead with a plan to limit the Kremlin’s revenues from oil exports by imposing a price cap on Russia’s overseas shipments. The idea is far from garnering support from Moscow’s biggest customers in Asia, but it is focusing minds in the oil companies whose sales are at risk.
US Deputy Treasury Secretary Wally Adeyemo is visiting India this week, where the price cap will be one of several topics for discussion. But he’s more likely to hear about New Delhi’s reservations than to pick up another ally. India has emerged as the savior of Russian crude exports shunned by European buyers, and its leaders are worried that support for the US plan would end the flow of cheap oil. They’re probably right.
That doesn’t make the US strategy wrong. Officials are rightly worried that European Union sanctions on Russian crude, due to come into effect Dec. 5, could send oil prices skyrocketing. They could remove another 2 million barrels a day of crude from a tight market, according to vessel tracking data monitored by Bloomberg. A subsequent ban on refined products could be even more damaging. Earlier US sanctions were less of an issue because the oil trade between the two countries was relatively small.
By imposing a price cap, the US hopes to hit the Kremlin’s war chest while preserving oil flows from the country. Of course, that will work only if Russia agrees to sell its oil under such restrictions. It probably won’t.
But the threat of action has got Russian oil companies thinking about securing markets for their crude. That is leading them to start offering long-term contracts to buyers with a baked-in price discount. Indonesia has been offered “a price that’s 30% lower than international market price,” according to minister of tourism, Sandiaga Uno.
Whether the price reduction comes through an imposed cap or offered discounts, its effect will be the same.
Oil output from Kazakhstan, a key supplier to the Mediterranean market, is languishing as a result of planned maintenance and unexpected problems. The impact of work at its largest oil field, Tengiz, has been compounded by a gas leak at its second biggest producer, Kashagan. In addition, more cracks have been found at the CPC export terminal in Russia, which handles about 80% of Kazakh crude exports. That’s likely to hurt shipments, with two of three loading buoys out of action.
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Best of the Rest
The worst is yet to come for Russian crude production, which has so far remained resilient in the face of unprecedented pressure from Europe and the US, according to Daria Melnik, a senior analyst at Rystad Energy A/S. After rebounding in June and July, output is expected to decline again due to a countrywide economic downturn and a drop in refinery runs and crude exports.
In this podcast from the Oxford Institute for Energy Studies, James Henderson and Mike Fulwood discuss natural gas markets. The discussion ranges from the impact of a loss of Russian supplies on individual European countries to the global competition for LNG, and supply and demand trends for 2023.
The Moral Rating Agency has published its latest analysis of corporate responses to Russia’s war in Ukraine, ranking both what companies have said and what they’ve done. While Shell Plc was praised for denouncing the invasion and quitting the country, the analysis shows that only 28% of 122 corporations involved in Russia spoke out against the incursion.
Bloomberg
