The day of reckoning for the oil market approaches

Energodigest | 16 September 2022
The oil market is now in ‘a state of schizophrenia,’ as the Saudi Energy Minister put it at the end of August, alluding to irrational pricing mechanisms. And market pricing is set to take another blow after 5 December. While previously the West was looking to reduce global oil supply as it adopted the sixth package of EU sanctions to ban seaborne crude oil imports from Russia, today the focus is on cost, with G7 leaders having decided to implement a price cap for global purchases of Russian oil earlier this month.

The US is depleting its oil cache faster than expected as it grapples with soaring energy prices: emergency crude oil stocks have fallen to 434.1 million barrels, their lowest since October 1984[1] (see Fig. 1). If the drawdown continues at the current rate, the country’s strategic petroleum reserves could decline to a 40-year low of 358 million barrels by the end of next month.
The success of the price cap proposed by the G7 hinges mostly on China and India. But these two countries are unlikely to join the coalition, as they buy Russian oil at a good discount – a solution that suits both parties.[2] Agreeing to the price cap could create a rift with a key energy supplier, which is especially dangerous in the current turbulent times.

That said, the discount of Russian crude continues to narrow against the global benchmark: over the past two months, it is down nearly 50% to $20 a barrel (see Fig. 2), though this was largely due to lower tanker rates. Note that until recently a barrel of Brent had traded only $1-2 higher than Urals.
Surging sales of oil-class tankers could be a positive factor to drive Russia’s eastbound crude flows: 42 second-hand tankers were sold during May-August, up from 12 in the same period last year, with about $1 billion spent, roughly five times the amount invested a year earlier.[3] The buyers are a mix of Chinese, Turkish and UAE firms[4] seeking to secure enough transportation capacity ahead of a shipping bottleneck this winter.

In this situation, Russia has a good chance of expanding its shipments via the Northern Sea Route. This can play into the hands of those who decide to go against the flow and refuse to join the price cap mechanism.
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