Capping Russian crude: could it work?
Energodigest | 27 July 2022
Russian crude continues to sell cheaper than the North Sea benchmark, with a barrel of Urals offered at an average discount of $21 in July (see Fig. 1). Though its price is still $10 higher than last year, it isn’t higher when converted to rubles, but actually dropped 10% y-o-y in the first summer month, as is shown in Fig. 2.
The US is pushing hard for other countries to back the proposed cap of $40-$60/bbl on Russian oil.[1] If imposed, the price cap could be a way to mitigate the effect of the EU ban on insurance of seaborne imports of Russian crude, as purchases below the agreed threshold will be exempt from the ban. This step, however, may throttle supplies and send prices even higher. As a reminder, lifting costs in Russia vary widely, from $15 to $45 a barrel, depending on geology.[2] With other cost inputs, such as transportation, storage and taxes, some oil quantities will no longer be commercially viable to extract, which may prompt production cuts. A 3-million-barrel cut in daily supplies would push crude prices to $190 a barrel, while the worst-case scenario of 5 million could mean a “stratospheric” price of $380.[3]
Note that not all countries are ready to back the US plan. For China and India, for example, which have both ramped up their crude oil imports from Russia, this proposal may not be strategically attractive in the long term. As for now, they are buying crude at a generous discount, while other countries rush to find alternative suppliers.
Meanwhile, Russia plans to launch a national oil trading platform in October and attract enough buyers to establish its own benchmark crude by March-July next year. This idea has been around for several years, as market players wondered why Urals should be pegged to Brent, with both crudes trading on the same markets and Urals selling better than Brent. Another pressing issue is payment security. If Urals becomes a benchmark crude trading on a domestic exchange, Indian and Chinese companies will be able to sign direct contracts. This is a real possibility as the global oil market becomes more regionalized, while national currencies acquire a stronger influence. In theory, this should also take care of the discount issue.
Note that not all countries are ready to back the US plan. For China and India, for example, which have both ramped up their crude oil imports from Russia, this proposal may not be strategically attractive in the long term. As for now, they are buying crude at a generous discount, while other countries rush to find alternative suppliers.
Meanwhile, Russia plans to launch a national oil trading platform in October and attract enough buyers to establish its own benchmark crude by March-July next year. This idea has been around for several years, as market players wondered why Urals should be pegged to Brent, with both crudes trading on the same markets and Urals selling better than Brent. Another pressing issue is payment security. If Urals becomes a benchmark crude trading on a domestic exchange, Indian and Chinese companies will be able to sign direct contracts. This is a real possibility as the global oil market becomes more regionalized, while national currencies acquire a stronger influence. In theory, this should also take care of the discount issue.