Source: [Tatiana Meel/Reuters]
Russia’s oil revenue is finally being impacted by a nearly complete prohibition on the entry of Russian petroleum into the European Union. Concerns that it would give the Kremlin a windfall to finance its conflict in Ukraine have been allayed – for the time being.
The US Administration was concerned that the Monday-effective EU penalties on Russian crude by sea would cause prices to rise. A ban on providing ships and services, such as financing and insurance, for Russian commodities traveling anywhere in the world was of special concern.
The US suggested capping the price of Russian exports to lessen the effects. The shipping and services embargo would not apply to goods bought below the cap, which would finally be set at $60 per barrel.
But it appears that they didn’t need to be concerned—at least not yet.
The final cargo of Russian barrels has arrived at European ports. For more than 1.5 million barrels per day, Moscow has lost a market right outside its door.
By the end of the year, it appears that it will lose sales of another 500,000 barrels a day if Poland and Germany keep their word and stop importing oil through pipelines.
But instead of skyrocketing, oil prices have fallen.
Russian crude export prices have decreased considerably more recently. At the nation’s Baltic ports, which continue to be its primary export markets, its crucial Urals export grade was trading for little over $40 per barrel.
That is well below the $60 per barrel price cap imposed in conjunction with the EU import embargo and is roughly the level determined as the breakeven cost of production.
The fact that Russia’s Baltic ports are still crucial even after losing its European market demonstrates its incapacity to reroute oil shipments.
The single supply route to Russia’s last remaining markets in China is already fully utilized by the only pipeline to China, the Kozmino export terminal on Russia’s Pacific coast.
Long journeys around Europe and through the Suez Canal connect India with Turkey.
The EU restrictions have instead produced localized gluts of crude in those markets, not a scarcity.
Due to the fierce competition between the large amount of Russian oil and the typical Middle Eastern suppliers, dealers are forced to provide steep discounts in order to cover the high expense of the longer routes needed to convey cargo from the Baltic.
Europe, meanwhile, is not in a rush to find crude. As I said back in early November, the globe can easily cope with the loss of Russian barrels for the time being due to Russia’s invasion of Ukraine, which has driven inflation, notably for food and energy.
In the upcoming months, that might alter. As a result of loosening travel restrictions and a delay in economic activity, gasoline demand may finally be rekindled in China by the relaxation of Covid limitations. The market will become more restricted as a result.
Additionally, a more severe EU import embargo on Russian refined oil products like diesel may soon be implemented. That might disrupt the oil markets, which are already low on transportation fuel.
Putin on reducing oil production
As a result of the price ceiling on his crude, Russian President Vladimir Putin is threatening to reduce oil production. If the oil industry is unable to sell its oil at a profit, it may decide for him.
Next month’s oil export duties will already have a significant negative financial impact on the Kremlin. Russia’s per-barrel duty may drop in January to its lowest level since the Covid-19 outbreak reduced revenue in early 2020, based on petroleum prices since the middle of last month.
READ MORE: EU signals oil embargo with deepening Russia- China ties
