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How Will Oil Market Respond to Upcoming Russian Sanctions?

By Ellen R. Wald, Ph.D.CommoditiesDec 01, 2022 05:38AM ET
www.investing.com/analysis/how-will-oil-market-respond-to-upcoming-russian-oil-sanctions-200632990
How Will Oil Market Respond to Upcoming Russian Sanctions?
By Ellen R. Wald, Ph.D.   |  Dec 01, 2022 05:38AM ET
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I have written in depth about the upcoming Russian oil sanctions and price cap and outlined two basic scenarios for how traders can expect the market to react. However, no consensus has been reached on the actual price per barrel of the price cap. Poland, Latvia and Lithuania want to cap Russian oil at $30 per barrel because Russia’s cost of production is about $20 per barrel. The G7 countries want a price cap of $65-$70 per barrel. Greece, Malta and Cyprus want an even higher price per barrel because they have major shipping businesses that would be negatively impacted by the price cap policy domiciled in their countries. The European Commission proposed a compromise price of $62 per barrel, but as of Wednesday, Nov. 30, no compromise had been reached.

However, this week, Russia’s Urals blend oil traded at $55 per barrel, its lowest price since 2021. This reflects a $30 per barrel discount from the price of Brent. This means that if the agreed price cap is lower than the price of discounted Urals, it will be meaningless because shipping companies and insurance companies won’t be subject to sanctions. Most seaborne Russian crude will remain on the market. Other blends of Russian crude that currently trade for about $74 per barrel will be impacted, but those blends don’t reflect the majority of Russian seaborne crude oil.

If the price cap is high enough that Russia can continue to sell its discounted Urals crude at current prices, then traders should expect the price cap policy to have little impact on the market. The market will still experience some dislocation because European countries won’t be able to import Russian crude oil after Dec. 5, but many countries have been winding down their Russian crude oil purchases throughout the year. In addition, European countries will be able to import products produced with Russian crude oil in other countries, so as India, China, Turkey and Indonesia increase their purchases of Russian crude and export more petroleum products, the prices of these products should decline. Of course, if European countries have to import gasoline and diesel from Asia instead of from refineries in Rotterdam, transit time and shipping costs will increase.

Traders should also pay close attention to the OPEC+ meeting on Sunday, Dec. 4. Even though markets are closed that day, OPEC+ plans to meet virtually. Last week, it seemed the group might be discussing a supply increase but this week the rumors are that OPEC+ is discussing a supply cut.

Goldman Sachs thinks that OPEC+ producers are concerned about the recent price declines and will act to cut production in order to shore up prices. However, five OPEC+ delegates said that OPEC+ will likely decide not to change production quotas at all. According to two other OPEC+ sources, the group will discuss cutting production quotas, but it is more likely that the group will keep quotas unchanged.

Since OPEC+’s meeting will take place the day before the implementation of Russian oil sanctions and the price cap, OPEC+ is likely to avoid making any changes to production quotas until it has had time to observe how the market reacts. OPEC+ can call an “extraordinary” meeting to change production quotas if they believe that is needed.

How Will Oil Market Respond to Upcoming Russian Sanctions?
 

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How Will Oil Market Respond to Upcoming Russian Sanctions?

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Comments (5)
Jeff
Jeff Dec 02, 2022 4:40AM ET
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Will the Arab States really cede power to Brazil and Argentina where China has a huge presence? I don't believe a cut in production is coming. The EU States may work separate contracts. Do they ever agree? Has there been any progress at EU refineries?
dim dim
dim dim Dec 01, 2022 7:42PM ET
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*after the oil cap decision, (only kindergartners could do that), to expect an oil price for the first half of 2023, at 250 USD/barrel, is very simple but difficult for outsiders to understand how the rules work of international trade, and that you don't put a ceiling on a product you don't have, because that's the same as suicide!!
Jim Morrison
Jim Morrison Dec 01, 2022 2:57PM ET
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typical government failing upwards. tried to go green with no realistic replacement then decides they are going to set the price of oil. seriously can't make that up. it won't work.
EL LA
EL LA Dec 01, 2022 12:28PM ET
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Why stop at 30? Why not go all the way to the pandemic lows of -40 and return yourselves to the Dark Ages?
Paul Dunne
Paul Dunne Dec 01, 2022 9:44AM ET
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Cypress?
 
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