Named the consequences of the “ceiling” of Russian oil prices and cuts in OPEC + production

In the context of the preparation of the eighth sanctions package, the EU countries finally agreed on the “most controversial” issue – setting a price limit for Russian oil. Specific cost parameters have not been determined, and that they have yet to be agreed. Thus, we are still talking about some kind of framework step, the final version of which can take any form. Meanwhile, the OPEC + countries, according to news agency sources, have agreed to reduce oil production by 2 million barrels per day.

“In December, a ban on the import of most crude oil from Russia will come into force,” reminds Politico. “The draft new EU measures provide the legal basis for the price ceiling that was previously agreed by the G7 countries.” The publication notes: this step is due to the fact that since February, “the Kremlin’s treasury has increased by tens of billions of euros due to sales of fossil fuels to Europe.”

According to Politico, the prospect of a price cap has alarmed Malta, Greece and Cyprus, whose tanker fleets account for most of Russia’s exports to the EU. They were promised some “indulgences and concessions”. The EU permanent representatives also had to meet the needs of Budapest, which delayed the adoption of new sanctions for several weeks until it achieved relief for its own needs. In particular, the price restrictions do not apply to pipeline oil supplies and “sea supplies replacing them in an emergency,” said Hungarian Foreign Minister Peter Szijjarto.

In turn, Moscow, through the mouth of Deputy Prime Minister Alexander Novak, called the very idea of ​​​​a price ceiling completely absurd. According to the official, the Russian Federation will not work on non-market conditions and will stop supplying oil to countries that have approved this measure. In general, the situation raises a lot of questions. History knows no precedent, Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation, recalls: a trade embargo means a complete ban on the sale of a certain product (as is now the case with Russian oil), but does not imply limiting its value.

Be that as it may, the raw material sector (and hence the budget) of Russia cannot avoid problems. More precisely, they have already been identified and are growing. In August, the Treasury’s oil and gas revenues amounted to 672 billion rubles. This is the minimum value over the past year and a half, and when compared with the figure for the third quarter of 2021, the figure decreased by 14.6%.

The International Energy Agency has calculated that since May, tanker deliveries of Russian oil to the US, UK and EU countries have decreased by 2.2 million barrels per day, but two-thirds of this volume has been redirected to China, India and Turkey.

The situation is partly saved by high quotes: we recall that the federal budget was drawn up based on the cost of the domestic grade Urals at $44.2 per barrel, and in the first nine months of this year, the average price was $80 per barrel. Since the parameters of the price ceiling are not yet known, the consequences for Russia can only be judged with a very high degree of imagination.

By the way, as stated in the US Treasury, they plan to introduce a limit in three stages: first on crude oil, then on diesel fuel and, finally, on products with a lower cost. An important clarification from the department: if raw materials from the Russian Federation undergo radical processing in another country, the final product will no longer be considered Russian. Conventionally, if this happened at a refinery in India, and then the goods on a tanker (especially under the Indian flag) moved to Europe or to some Asian region, the price ceiling mechanism will not work.

“There are still more questions than answers in the intrigue around the price cap. Therefore, it is difficult to reliably assess the potential impact of this measure on the Russian economy, says Mark Goykhman, chief analyst at TeleTrade. – While the conditional range of $40-60 per barrel is being discussed. This is slightly lower than the current prices at which Urals is sold, including discounts. The market outlook is also unclear.

OPEC+ countries, according to sources, agreed to reduce production by 2 million barrels per day, which could push Brent quotes back above $100 from the current $91-92. OPEC+ opposes the limit for Russia, fearing setting a precedent for other exporting countries. And the higher the difference between the market and the “ceiling” prices, the less likely the actual compliance with the limit value.

The parameters set by the European Union and the G7 will not necessarily be observed by China and India: by increasing supplies to these countries, Moscow provides them with an uncontested 30% discount.

As for Europe itself, if its carriers and insurance companies adhere to the requirements associated with the price ceiling, then the profitable services they provide will gradually move to players from other regions of the world, primarily Asia and Latin America. So it is highly likely that in reality everyone will simply ignore this restriction. Moreover, Goykhman argues that violators are not threatened with any sanctions, and it is extremely difficult to control compliance with the conditions, both technically and legally.

For example, the EU is going to introduce a system for monitoring tanker flag changes to control the circumvention of sanctions against Russian oil. But how to do this in practice is completely incomprehensible: why not start some kind of “police” flotilla, which, like a traffic cop on the road, will stop all suspicious tankers in the seas and oceans!?

“Finally,” the analyst concludes, “the initiators themselves may suffer from the price limit. In the event of a significant drop in Russian exports, world prices run the risk of soaring to $130-140. The G7 states and the EU are active consumers of oil, and its rise in price when imported from outside Russia will spur inflation there, as well as the costs of business and the population. Well, Russia itself is not in a position to completely reorient supplies to other directions: due to limited demand and problems with logistics, it will be possible to replace the falling volumes by no more than 50-60%.”