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Oil prices shrug off cap as Russia fires back with price floor threat

Deteriorating economy overshadows tight supply concerns
EQUINOR

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Despite OPEC+ deciding not to further cut production on December 4, the start of the Russian crude oil price cap at $60 on December 6 and the ongoing war in Ukraine, U.S. oil prices fell on December 12 as traders are concerned a weakening global economy will cut demand.

Brent crude futures were down 38 cents, or 0.4%, at $75.72 a barrel by 0900 GMT. U.S. West Texas Intermediate crude was at $70.76 a barrel, down 26 cents, or 0.3%. Last week, Brent and WTI fell to their lowest since December 2021 amid concerns that a possible global recession will impact oil demand.

The Group of Seven (G7) nations with the European Union and Australia have agreed to a $60 per barrel price cap on Russian seaborne crude oil except for Slovakia, Hungary and the Czech Republic, all of which are still heavily reliant on Russian oil. However, Moscow will not ship crude oil to anyone adopting the price cap and to consider putting a price floor under its oil exports.

Price caps in whatever form when applied in free exchange type markets pose severe problems in market behavior and undermine the whole concept of derivative trading, Institute of Energy of South East Europe (IENE) Chairman Costis Stambolis said, noting that the EU and its members have a number of tools at their disposal if they really want to curtail gas, and electricity, prices. However, they lack the political will to do so since adopting such measures will inevitably bring them into conflict with their much-touted green agenda.

According to CNBC, new Turkish insurance rules on oil tankers carrying Russian crude have slowed down the movement of tankers off the coast of Turkey and between Russia’s Black Sea ports and the Mediterranean.

The Organization of the Petroleum Exporting Countries, and other major oil producers led by Russia, a group known as OPEC+, decided to continue to restrict supply by 2 million barrels per day, a policy set in October that started last month and is due to run through the end of 2023.

OPEC said in a statement the decision was purely driven by market considerations and recognized in retrospect by the market participants to have been the necessary and the right course of action towards stabilizing global oil markets; and adhering to the approach of being proactive and pre-emptive, the Participating Countries reiterated their readiness to meet at any time and take immediate additional measures to address market developments and support the balance of the oil market and its stability if necessary.

OPEC has changed fundamentally in recent years, coinciding with the change in leadership in the most influential members of the group, such as Saudi Arabia and the United Arab Emirates.

“OPEC knows there is a clock ticking against them as the major world economies plan to significantly reduce oil usage by the middle of the next decade,” Chris Weafer, co-founder of Macro-Advisory, wrote in a note to investors from Tashkent, Uzbekistan, noting that both volumes and pricing power will be gone within ten years. That’s their window to maximize sustainable oil revenues and to use that money to create new economic drivers.

China, the world’s largest country by population and the biggest crude oil importer, has ignored the price cap on Russian crude, some cities are easing COVID-19-related restrictions, though streets in the capital Beijing remained quiet and many businesses stayed shut over the weekend, Reuters reported, adding that on December 12 queues formed outside fever clinics in Beijing and Wuhan, the latter being where COVID first emerged three years ago.

Oil markets will likely stay volatile in the near term amid uncertainty over the impact on Russian output from the EU’s ban, headlines on China’s COVID policy and central bank movements in the U.S. and Europe.

Russia has shifted a lot of oil to Asian markets this year, especially to China and India, but the Russians are now almost at capacity with available infrastructure, i.e., pipelines, train wagons and tankers. It will not be able to shift all the oil lost to the European market when the seaborne crude ban starts and the prohibition on oil product imports starts, Weafer said, while estimating that Russian production will decline by approximately 1.5 million barrels to between 8.5 and 9.0 million barrels per day by the end of the first quarter next year.

Canada’s TC Energy is continuing efforts to determine the cause of a leak in the 622,000 barrel-per-day Keystone pipeline which links fields in Canada to refiners on the US Gulf Coast. A date for a restart hasn’t yet been set.

IGB boosts gas diversification in Europe

As the energy crisis is still unfolding in Europe, the IGB pipeline, which transports natural gas from Greece to Bulgaria, is expected to decrease regional dependence on Russian gas and enhance energy security. The commercial operation of the Interconnector Greece-Bulgaria (IGB) started on October 1, 2022.

IGB is changing the gas and energy map in the Balkans. The opportunity for the region to connect even further to the gas networks of Southeast and Central Europe and become a gas hub can be achieved through the construction and operation of several gas infrastructure projects that are now in the planning and implementation phase.

The strategic importance of IGB can easily become a significant project for the wider region of Southeast Europe and the Balkans, providing alternative gas supplies and also helping diversify the energy sources of neighboring countries.

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Co-founder / Director of Energy & Climate Policy and Security at NE Global Media

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