The west tried to cut Russia’s Revenue from oil exports without global prices skyrocketing since February. Both goals are currently being achieved. Russia is exporting as much oil as it did before invading Ukraine, but Ural crude, the main variety it pumps, is trading at a 37% discount to Brent, the global benchmark, meaning Moscow is getting a bad deal power. Brent, meanwhile, has fallen to a yearly low of around $80 a barrel (see chart), meaning consumers are less likely to face an energy crisis.
Little of this can be attributed to Western efforts. On December 14th and 15th central banks in America, Great Britain and the EU announced rate hikes and signaled more were coming, sucking demand from the economy. China, rocked by rising Covid-19 cases, released its worst factory and retail data in six months. Members of the Organization of Petroleum Exporting Countries (OPEC) and its allies are producing almost as much as they did before announcing a cut in their joint target in October, as most have already pumped below their quotas.
The western boycott of the Urals, which accounts for 10-15% of world crude oil supply, is likely to lower its price somewhat as the quality undercuts others. An exemption from Europe’s insurance ban for tankers carrying Russian oil, which applies to buyers willing to pay a maximum of $60 a barrel, could help prevent a supply shock. But none of the measures have a major impact. If economic or market conditions change, prices could rise.
Additionally, financial enthusiasts appear to have pushed recent prices down more than usual, which could portend a sudden upward correction if supply and demand fundamentals rebound. An industry source points out that large “sell” orders have been placed every day by 2pm London time for the past few weeks. Events that should push prices higher, such as the closure of America’s Keystone pipeline, one of the world’s largest, on December 9 seem to have gone unnoticed, notes Saad Rahim of Trafigura, a trading company.
There could be another oil shortage by the second quarter of 2023. Industrial consumers in Europe are switching from natural gas to cheaper gas oil. Consumption in India and the Middle East is proving more robust than expected. China’s reopening is likely to fuel an economic recovery after the peak of cases.
There are already signs that the European insurance ban could prove more disruptive than expected. That ie, an official forecaster, said Russia will be forced to cut production by 1.6 mb/d to 9.6 mb/d by the second quarter. Called charges of a small Russian variety ESPO, which recently traded above $60, unlike the Urals, has almost halved since Dec. 5, when the cap was introduced. Should rising oil demand push Ural’s price above $60, shipowners might also have concerns about transporting it.
Russia has threatened to cut supplies to countries sticking to the cap, and growth elsewhere is expected to be sluggish. A global supply deficit would eat up already low global inventories, which remain near five-year lows, and push prices even higher. All of this means that the real test of the West’s oil war tactics is likely to arrive within the next year. ■
