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Oil embargo, oil price cap, diesel crisis: why the oil price could soon break the 100 dollar mark again

2022-11-24T06:43:52.550Z


In less than two weeks, the time has come: EU sanctions against Russia's oil industry will come into force. There is much to suggest that the price of oil will soon start climbing again after its recent recovery.


Enlarge image

Farewell to Russian oil:

From December 5, the TotalEnergies refinery in Leuna will have to do without Russian crude oil

Photo:

Getty Images

With the fall in energy prices, the pressure on the economy has eased somewhat in recent weeks.

The flood of liquefied natural gas (LNG) from overseas, the mild weather and full gas storage facilities in Europe have pushed the gas price down massively – from around 280 euros per megawatt hour in August to 116 euros this week.

The gas price is still at seven times the level it was before the gas crisis.

But now a new risk factor is emerging: the price of oil.

This fuel has also become significantly cheaper in recent weeks.

A barrel of Brent crude oil from the North Sea, for example, only cost 87 US dollars per barrel instead of 115 dollars as in the summer. An important reason for the price drop was China’s zero-Covid policy and the resulting drop in demand on the markets.

However, there is now a lot to be said for a turnaround.

In just a few days, the European Union (EU) sanctions against Russia – the EU's main oil supplier – will come into force.

From December 5, no more Russian crude oil will be allowed to flow into the EU by sea.

At the same time, a price cap for Russian oil will be introduced as a further sanction, together with the G7 countries.

And in February, as a third measure, the EU embargo will also be extended against Russian oil products.

All of this will have a massive impact on the market.

Insurance ban tied to crude oil embargo

The sanctions at the beginning of December threaten to become the biggest price driver.

With the sixth package of sanctions, the member states of the EU decided in May that they would boycott imports of Russian crude oil by sea from December 5th.

The EU had not been able to bring itself to a complete boycott due to the great dependency of individual states.

Above all, Bulgaria, Croatia and the Czech Republic blocked;

they now benefit from exemptions.

Crude oil imports via pipelines such as the Druzhba, which supplies Hungary, the Czech Republic, Slovakia and Germany, for example, remain exempt from the embargo for the time being.

At the time, Germany had pledged to stop using pipeline oil as well, which put the eastern German refineries in Leuna and Schwedt in particular under pressure to find replacement supplies.

According to the latest warnings from the federal government, bottlenecks and higher prices are now to be expected there.

"Depending on the scenario, local, temporary supply bottlenecks and price increases cannot be ruled out, comparable to the effects of the Rhine low water in parts of southern Germany this summer," said the federal government in response to a small request from the CDU/CSU.

But a price increase is also to be expected on the world market.

An insurance ban is linked to the oil embargo and the upper price limit for Russian oil, which will come into force on the same day.

The measure bans companies in the EU from insuring and financing the transport of Russian oil to third countries, in particular by ship.

That, too, could have significant consequences.

On the initiative of the G7 countries, which include Germany, Italy and France, Canada, the USA, the United Kingdom and Japan, oil from Russia can only be insured and shipped if it is traded at or below a certain price.

Shipowners based in the EU and the G7 countries transported 55 percent of Russian crude oil exports from the Baltic and Black Seas in September.

The G7 estimates that around 95 percent of the world's oil tanker fleet is covered by marine insurers in the G7 countries.

In short, the sanctions severely limit Russia's option to continue exporting crude oil and petroleum products to the rest of the world.

World market could be missing 1 to 2 million barrels

According to market observers, Russia is currently building its own "shadow fleet" in order to avoid the price cap.

It is assumed that it consists largely of disused tankers.

But even if Moscow wins more ships, sanctions will see Russia's oil exports fall significantly this winter, says

Russell Hardy

, chief executive of the world's largest independent energy trader Vitol.

"It is to be expected that almost all European companies will turn away from transactions that do not comply with the sanctions," said the Vitol CEO of the "Financial Times".

According to Hardy, exports are likely to collapse by up to 1 million barrels a day despite the pariah fleet.

In December 2021, Russia exported around 5 million barrels per day, according to the International Energy Agency (IEA).

The logistical problems alone are likely to cut off a significant part of the global oil supply, at least in the short term.

This trend can already be seen.

Total volumes shipped from Russia fell to a nine-week low of just 2.67 million barrels a day last week, according to Bloomberg data.

With that, two weeks before the sanctions came into effect, Russia has already lost more than 90 percent of its market in north-western Europe, which has been the mainstay of shipments from the Baltic and Arctic terminals.

The Kremlin's weekly earnings from oil trades via sea shipments fell to $109 million, the lowest since early January.

In April, Moscow had meanwhile taken 232 million dollars.

In the period since the start of the war against Ukraine in February, Russia has diverted more than a million barrels of crude oil per day to the customer countries India, China and Turkey, according to the latest monthly report from the IEA.

However, this is not enough to fully compensate for the lost deliveries to western industrialized countries.

And the fillers could have reached their limit, according to the IEA experts.

They expect Russian production to be almost 2 million barrels below pre-war levels by the end of March 2023.

Russia's reaction to price caps is crucial

Russia's reaction to the price cap is now decisive for the effects of the sanctions on the oil price.

The price cap, designed to prevent Russia from selling its oil at high prices outside the EU, is expected to be between $65 and $70 a barrel of Russian crude.

The G7 countries have not yet reached a suitable level.

For Allianz, the measure is a fine line. On the one hand, they want to reduce Russia's income from the oil business, which the Kremlin uses to finance the Ukraine war.

On the other hand, they must give Moscow an incentive to continue producing oil.

If the Russian supply ceases, there is a risk of an exorbitant rise in the price of oil.

Kremlin warns against trading only oil without a price cap

Russia has already indicated that the state oil companies Rosneft, Lukoil and Co. will not sell oil below the price ceiling.

This means that either Russia's oil giants have to develop alternative supply chains to circumvent the measures, or shut down oil production sites.

It is likely that the oil price will rise, at least in the short term.

Analysts expect that Russia will try to overturn the sanctions.

"We anticipate that a large portion of Russia's crude oil will be transported via non-Western marine insurance and services,"

Shin Kim estimates

, Head of Oil & Gas Supply Analysis at S&P Global Commodity Insights in an analysis.

But Russia will probably not be able to divert all the boycotted oil.

For the first quarter of 2023, the analysts expect 1.5 million barrels per day, which the world market is missing due to export hurdles from Russian oil production.

Over time, however, the price is likely to fall again if Russia finds further ways around the sanctions and more oil becomes available on the market again.

Vladimir Putin

(70) is likely

to get help from his new ally Iran, which has experience in circumventing punitive measures such as oil transport on the high seas under the radar.

And it also remains questionable whether the big buyers, India and China, will allow the West to dictate their prices.

US Treasury Secretary

Janet Yellen

(76) recently said India can continue to buy as much Russian oil as it wants, even at prices above the price cap - as long as the country stays away from Western insurance, financial and maritime services.

Either way: Russia will have a very difficult time if the EU stops buying Russian oil, said Yellen.

"They will be looking for buyers. And many buyers depend on Western services."

So there is reason enough to believe that supply is falling and that the price of crude oil could shoot up in the short term in the coming weeks.

Diesel crisis in Europe imminent

By the new year at the latest, diesel prices should also rise sharply.

The next sanctions will take effect on February 5: the EU embargo on Russian oil products.

This applies to imports of heating oil and diesel, for example.

According to experts, Europe will then face a shock in the supply of diesel.

Russia is still Europe's largest supplier of diesel.

This has not changed nine months after the beginning of the war.

From February, Europe is likely to start sourcing more diesel from the Middle East and India, Europe's second and third largest diesel suppliers.

However, this is associated with enormous financial costs, according to

Benedict George

, diesel expert at price reporter Argus Media, in a recent analysis.

"Each additional barrel that Europe buys has to be won by Asian buyers at increasingly higher costs."

The unusually low inventories also have a price-driving effect.

Due to the current price structure on the futures market, the so-called backwardation, it is more worthwhile for the seller to sell the diesel now than to store it.

In the spring, diesel stocks in north-west Europe will therefore fall to their lowest level in at least 12 years, forecasts consultancy Wood Mackenzie.

Dealers are now stocking up on Russian diesel before their main supplier goes away in two months.

Source: spiegel

All news articles on 2022-11-24

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