But the $60 per barrel price cap-higher than many anticipated earlier last year when the concept was first mooted-also alleviated concerns about a supply shock from Russia. Algorithm-driven trading also seems to be increasing volatility and exacerbating market swings, magnifying the impact of negative economic news. The negative economic outlook in Europe, high interest rates, and skepticism about a Chinese economic rebound in 2023 are dominating market sentiment. So far, this has not happened.īrent prices fell below $80 per barrel in early December and remained just below that level on January 9, mainly due to concerns about economic weakness. Strategic Petroleum Reserve (SPR) releases, would create a much tighter oil market. Bullish analysts argued last year that the EU embargo and the price cap, combined with tapering U.S. Those price caps will be harder to design and implement, given the lack of global benchmarks for refined products, the smaller refined product tanker fleet, and the complexity of determining the country of origin of various products.Ī2: The immediate price impact has been quite limited. Details are still limited, but it appears there will be multiple price caps for different products: high value light products like diesel, and lower value products like fuel oil. The “price cap coalition” is now preparing to impose caps on Russian refined product exports by February 5. The EU embargo also exempts Russian maritime crude oil and product exports to Bulgaria until the end of 2024, as well as exports of vacuum gasoil to Croatia until the end of 2023. That would leave Hungary, Slovakia, and the Czech Republic as the remaining customers, implying a potential drop in Druzhba pipeline flows from about 750,000 barrels per day (b/d) in 2021 to below 300,000 b/d in the first quarter of this year. Russian pipeline exports are not subject to the EU embargo, but Poland and Germany have vowed to phase out imports from the Druzhba pipeline’s northern arm. Each subsequent change to the price cap will introduce an adjustment period of 90 days. Policymakers will aim to set the cap at least 5 percent below “the average market price for Russian oil and petroleum products,” calculated on data provided by the International Energy Agency. At the urging of EU states, including Poland and Estonia, the European Union also agreed to review the price cap every two months. Treasury’s Office of Foreign Assets Control (OFAC) and its counterparts in Europe created an attestation process for market players to verify they are only supporting transactions at or below the price cap. These countries barred support services for Russian crude oil shipments above the price cap-including trading and commodities brokering, financing, shipping, insurance as well as protection and indemnity, flagging, and customs brokering. The G7, the European Union, and Australia also imposed a long-anticipated price cap on Russian crude oil at $60 per barrel. But while Russia’s seaborne oil exports dropped in December, they could bounce back as risk aversion fades, and it remains unclear how widely the price cap is being adopted.Ī1: As of December 5, the European Union embargoed seaborne crude oil imports from Russia. The EU embargo and price cap are institutionalizing these discounts and forcing Russia to ship its oil over longer distances to a dwindling number of buyers. Brent crude was below $80 per barrel as of January 9 and Russian crude is still trading at deep discounts. Few observers predicted that oil prices would be this low in early 2023 following last month’s EU embargo on seaborne Russian crude and the new EU and G7 price cap on Russian oil.
1 Comment
8/25/2023 11:54:36 pm
What an enlightening read! This article beautifully captures the essence of the oil industry's intricate dynamics and its vital role in shaping our world. Kudos to the author for shedding light on this fascinating subject
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