Russia is exploring new measures against the oil price ceiling

The Russian Ministry of Energy may prepare “if necessary” additional measures to counteract the price ceiling for Russian oil. In particular, they can be aimed at “limiting the possible discount” on Russian raw materials for deliveries abroad “up to the limits based on market prices.” This was announced on January 10 by the press service of the ministry.

The release notes that the decree of the President of the Russian Federation published on December 27, 2022 “prohibits Russian companies from referring to illegal price restrictions imposed by Western countries in any form, directly or indirectly.” This ban, emphasizes the Ministry of Energy, applies to any transactions with Russian oil up to the end consumer, which implies, among other things, the refusal to work with traders who do not comply with this rule of the presidential decree. The ministry emphasized that in the near future detailed information on the procedure for applying the decree, as well as details of the procedure for monitoring the state of Russian oil prices and discounts, will be published.

On January 9, Bloomberg, citing data from the Argus pricing agency, reported that Russian Urals oil on January 6 was sold at a price one and a half times lower than the price ceiling set by the EU, that is, at $37.8 per barrel. This price level, according to Argus, was recorded in the Baltic port of Primorsk in the Leningrad region. Brent benchmark oil was trading at $78.57/bbl that day.

After the start of the NWO in Ukraine and the strengthening of anti-Russian sanctions, oil companies from Russia had to redirect oil supplies from Europe to Asia and sell fuel at a discount to Brent. At the highs, it was approaching $35/bbl, by the beginning of autumn 2022 it dropped to $20-25/bbl, and in November-December it rose to $25-30. March Brent futures traded at $80/bbl on January 10, 2023, according to ICE.

At the end of December 2022, Deputy Prime Minister Alexander Novak said that the discount for Urals oil to Brent “has increased somewhat” amid market uncertainty. At the same time, the official expressed confidence that the size of the discount should stabilize in the near future. But the volatility of Brent prices in 2023, according to Novak, will continue and a barrel will cost between $70-100.

By the end of 2022, the countries of the European Union (EU) have agreed on a price ceiling for Russian oil in the amount of $60/bbl. The restriction came into force on December 5, along with a ban on the supply of Russian oil by sea to the EU countries. For petroleum products, the restriction will come into effect on February 5 (the ceiling level for petroleum products has not yet been set). In addition to the countries that are members of the European Union, the G7 countries, including the UK, Canada, the USA, Japan, and Australia, have joined the restrictions.

According to the text of the presidential decree on Russia’s response to the price ceiling, companies and traders are prohibited from supplying Russian oil and petroleum products to foreign companies and individuals if “the contracts directly or indirectly provide for a price cap mechanism.” The ban on oil supplies under contracts that provide for a price ceiling will come into force on February 1, 2023. At the same time, the decree did not limit the size of the discount, which formally makes it possible to export oil even cheaper than the ceiling level.

Initially, the Russian authorities considered three options for a response mechanism to the introduction of a price ceiling (Vedomosti wrote about this on December 7). The first option provided for a complete ban on the sale of oil to states that supported the restriction, including if they purchase raw materials from Russia not directly, but through intermediary countries or even a chain of intermediaries. The second (which was subsequently adopted) involved a ban on exports under contracts that included the condition of a price ceiling, regardless of which country was the recipient. The third is the introduction of the so-called indicative price, i.e., the determination of the maximum discount for Russian Urals oil to the reference grade Brent and a ban on sales when the discount increases.

Stock market expertBCS The world of investments” Igor Galaktionov draws attention to the fact that the price of $37.8/bbl. is not the price for the supply of all Russian oil. “This price is fair for shipments in the Baltic ports, which worked mainly for the European market,” he explains. Deliveries through pipelines and through other ports, he said, are “at a completely different price.” “For example, the same Bloomberg indicates the price for shipments from the Pacific port of Kozmino over $60/bbl,” the analyst notes. According to Galaktionov, “transparency in this matter should not be expected, since market participants are not currently interested in disclosing the terms of transactions.”

Igor Yushkov, a leading analyst at the National Energy Security Fund, agrees with him. “The fact that a single batch of oil in Primorsk was sold at $37.8/bbl does not mean that all Russian oil is sold at huge discounts. The further the port is from Asian markets, the higher the discount. There are less discounts for Urals exported from Novorossiysk,” he notes. Siberian oil of the ESPO brand (lighter and with a lower sulfur content than Urals. – Vedomosti) in the Far East, according to him, is sold at a discount of only $7-8/bbl. to the price of Middle Eastern grades of oil.

Galaktionov added that in the event of additional government measures to limit discounts on Russian oil, companies may have to justify to the regulator (Ministry of Energy – Vedomosti) the price in the contracts, which would involve too large discounts to market benchmarks.

Yushkov also draws attention to the fact that the Ministry of Energy now formally has no real leverage on prices in companies’ contracts. But the ministry can bring this issue to a higher level – up to the president of the Russian Federation, he believes.

The gradual reduction of discounts, according to Galaktionov’s forecasts, may begin towards the end of the second quarter of 2023.

Vedomosti sent inquiries to the Ministry of Energy and major oil companies.