June 25, 2024

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How Russia plans to overcome "oil price ceiling"imposed by the West

Russia expects to overcome any “difficulties” from the West imposing restrictions on Russian oil in the second half of 2023, and Moscow believes that it will establish full supply chains to Asian markets in the next three years.

In this way, it will overcome any sanctions on its own oil exports and continue its foreign policy without hindrance. Because Moscow sees the rise in Russian oil prices as a desperate attempt by the West to control Russia and its foreign policy.

With a high probability, countries will join Russia OPEC+since their authorities are well aware that what is now being done with Russia will sooner or later happen to them, and the reasons for this are not significant now, there would be a desire for this by the Western elites.

In short, the planet is already actually divided in two in terms of energy, and Russia-West will break off almost any relationship and contacts, and for those who can see the geopolitical map of the world, two new “blocs” are being created again: the West and the East.

Kremlin spokesman Dmitry Peskov called the “so-called price ceiling” on Russian oil set by the European Union “an illegal and absolutely absurd measure.” In response to this, by decree of the President of Russia, oil supplies in such conditions became impossible. What rules will be used to sell Russian oil and oil products? The answer was expected. The document prohibits Russian companies from supplying oil and oil products if the contract directly or indirectly provides for the use of the marginal price mechanism. At the same time, the possibility of such deliveries remains in case of special permission of the President. Russian companies now have a legal framework that they can refer to when negotiating with buyers.

Russia initially made it clear that it was not going to agree to a price ceiling. The OPEC organization of oil exporters fully supported Moscow in this matter, which is quite understandable – today the West is trying to set its own price for Russian oil, and tomorrow, perhaps, for Arab oil, if it considers that this is in its interests, or if it then wants to put pressure on Saudi Arabia to force her to do what he wants.

The presidential decree also applies to existing contracts, if they have such a price limit, Dmitry Peskov said on Wednesday. According to him, Russia did not consult with the alliance of OPEC + countries on the response to the price cap, internal Russian consultations were held. “It is Russia’s sovereign right to respond to such illegal, absolutely absurd measures, the so-called price caps. Therefore, it was preceded by an internal study by experts from Russia. Although on this issue, and on other issues related to energy markets, of course, the Russian side, through supervising Deputy Prime Minister Novak, is in constant contact with OPEC+ countries,” Peskov said.

What will Russia’s response mean in practice?

“The Russian Federation refuses to comply with the terms of the price cap mechanism, but at the same time it will act flexibly, based on the prevailing conditions. This position is quite reasonable. In case of submission to an attempt at external regulation of oil prices, this will turn into a serious mechanism of foreign political pressure on Russia,” – says Vitaliy Manzhos, senior risk manager at Algo Capital. “It will not be possible to buy oil under those contracts where there is a reference to a price cap during periods when the price is above $60 per barrel of Russian export Urals oil. And during 2023, such a period may be long. Therefore, importers should look for ways to bypass restrictions” , – says Vladimir Chernov, an analyst at Freedom Finance Global.

Sanctions EU on Russian oil and the price cap imposed on December 5 has not yet had a big impact on the oil market, but the ban on the supply of Russian petroleum products, which will come into force on February 5, may become a more serious factor, said Ronald Smith, senior analyst at BCS Mir Investment .”

How Russia prepared for the EU oil embargo

Against all odds, 2022 has been a good year for the Russian oil industry. “This is evidenced by the fact that the largest domestic oil companies were able to pay generous interim dividends this year. We are talking about NK Lukoil, Rosneft, Gazprom Neft. This is possible only if there is a significant profit,” says Manjos.

Oil production in 2022 not only did not decrease, but even increased by about 2% compared to 2021, to 535 million tons, oil exports will increase by 7.5%, to 242 million tons. These figures were announced by Deputy Prime Minister Alexander Novak. The production of gasoline and diesel fuel for cars is growing. Of course, this was facilitated by high oil prices, which at times reached $120 per barrel. However, in 2023 we should already expect a negative effect from the embargo and price restrictions.

The reorientation of Russian oil supplies has lengthened logistics routes and increased economic costs, Chernov says. At the same time, oil prices in 2023 are expected to be lower, and the discount for oil in the Urals, on the contrary, is higher than in 2022. So, according to Smith, in the first quarter of 2023, Brent will reach $95 per barrel, and by the end of the year it will drop to $85, plus or minus $5.

At the same time, the discount on Urals oil will rise to $40 in the first quarter amid restrictions. On the other hand, Smith adds, the increase in the Ural discount attracts Asian buyers and stimulates the creation of new supply chains. Experts predict that as a result, the situation with Russian oil supplies will improve in the second half of the year. Price differentials will be smoothed out once new supply chains stabilize in four months, Novak said. He does not exclude that at the peak, the decline in production may be 7-8%, but in general, by 2023, Russia will produce 490-500 million tons of oil per year. But a lot, of course, will depend on logistics. At the same time, Russia is addressing the issue of oil transportation by having its own tanker fleet, which is not afraid to succumb to sanctions and is ready to transport domestic product.

Another important point is the launch of the Russian tanker insurance mechanism

The Russian National Reinsurance Company has been recapitalized, and Russian-friendly oil-buying countries are accepting the change. Previously, the oil transport fleet and insurance were the exclusive prerogative of Western companies. According to Novak, now free port facilities allow transshipment of 35-40 million tons of cargo per year. Work is currently underway to expand them, which should be completed within the next three years. Novak expects that in 2025 Russia will increase the export of crude oil to 260 million tons per year, and precisely at the expense of the countries of the Asia-Pacific region.

The situation with oil products is more uncertain. Europe was the main market for Russian oil products. Novak says that it is not yet clear what the Europeans will replace our fuel with. He does not rule out that they will introduce exceptions, as happened with oil, when pipeline supplies and refineries in Bulgaria, the Czech Republic and Slovakia will not be subject to restrictions. In the extreme case, refining may be partly replaced by additional exports of crude oil.

“The current situation is expected to be an incentive to increase the volume of domestic oil refining. In general, the domestic oil industry will actively seek and find new export opportunities with the support of the government,” says Manjos. “It is in the second half of 2023 that we can expect a recovery in Russian oil production and export sales in the face of growing global demand. We expect demand to increase as soon as China’s Covid intolerance policy is completely lifted and the global recession passes. The situation can be resolved faster with the advent of an oil hub in Turkey, from where Russian oil can be sold to the EU countries,” Chernov predicts. Turkey says that it has every opportunity to transfer Russian oil to this hub without violating any restrictions. And Europe is likely to accept the Turkish version…

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