The alliance’s monthly report projects that, contrary to the previous prediction of 1.74 million bpd, global crude demand will increase by 1.64 million bpd in 2025.

The group has now undergone three consecutive downward revisions. According to the Vienna-based organisation, the revision was “primarily due to actual data received combined with slightly lower expectations” for certain regions.

In addition, OPEC maintained its prediction from September 2024 that the global economy would expand by 2.9% in 2025 and 3.3% in 2024, respectively.

The market is still far above the historical average of 11.4 million bpd observed prior to the pandemic, according to the organisation. This is mainly due to robust air and road travel, as well as expanding industrial, agricultural, and construction activities.

The International Energy Agency’s September 2024 estimate is still below OPEC’s oil demand growth forecast.

As a result of China’s economic slowdown and the growing popularity of electric vehicles, the IEA predicted that global oil demand would rise by 900,000 barrels per day in 2024 and 950,000 barrels per day the following year.

Global oil demand is predicted by OPEC to reach 104 million barrels per day in 2024 and 105 million barrels per day in 2025. Additionally, the alliance revised its estimate of Chinese market growth from 650,000 bpd to 580,000 bpd.

In September, OPEC revised upward its medium- and long-term global oil demand forecasts in an annual outlook amid these revisions.

The growth was led by the Middle East, Africa, and India, and the shift to cleaner fuels and electric vehicles was slower. World crude demand is expected to reach 111 million bpd in 2028 and 112.3 million bpd in 2029, according to the alliance’s annual report.

The post OPEC further trims global oil demand outlook for 2024 & 2025 appeared first on International Finance.

The November delivery of Brent crude futures expired recently, and the contract settled at USD 71.77 a barrel, down 21 cents.

Meanwhile, the more actively traded Brent contract for December delivery gained 27 cents to USD 71.81.

The global benchmark experienced its largest monthly loss since November 2022 when it fell by 9% in September 2024. The global benchmark fell by 17% in the third quarter, marking its largest quarterly loss in a year following a third consecutive month of declines.

WTI futures decreased by one cent, ultimately settling at USD 68.17. The US benchmark experienced its largest monthly decline since October 2023 of 7%, and its largest quarterly decline since the third quarter of 2023 of 16%.

The prospect that Iran, a major producer and member of the Organisation of the Petroleum Exporting Countries (OPEC), may be directly involved in an intensifying Middle East conflict supported prices.

Israel has intensified its attacks over the last two weeks, executing strikes that have struck Houthi targets in Yemen and killed leaders of Hamas and Hezbollah in Lebanon.

According to Matador Economics economist Tim Snyder, the market is considering whether the conflict in the Middle East will spread to other parts of the region.

The world’s second-biggest economy and top oil importer, China, announced fiscal stimulus measures recently, but the impact on oil prices was muted. Traders wonder if these steps will be sufficient to improve China’s demand, which has started the year off weaker than anticipated.

In addition, worries about growing global crude supplies are impacting the month’s prices.

The de facto leader of OPEC, Saudi Arabia, was reported to be getting ready to abandon its unofficial price target of USD 100 per barrel for crude as it prepared to increase output, which caused oil prices to plummet.

The post Oil slumps 17% in Q3 as Middle East conflict offset by slowing demand appeared first on International Finance.

Brent crude futures went up by 51 cents to USD 83.54 a barrel. On the other hand, US West Texas Intermediate crude futures were up 64 cents at USD 78.55 a barrel.

“[Hostilities] in and around the Red Sea by Iran-backed Houthi rebels on commercial ships are guaranteed to continue keeping the geopolitical risk premium at an elevated level,” PVM Oil’s Tamas Varga told Reuters.

United States crude inventories rose by 3.5 million barrels to 442.9 million barrels in the week ending February 16, the US Energy Information Administration (EIA) said, compared with analysts’ expectations in a Reuters poll for a 3.9 million-barrel rise.

“US crude inventories have climbed amid outages at large refineries that have left utilisation rates at the lowest level in two years, though the plants are soon to resume output,” Reuters stated further.

Refinery utilization rates were unchanged during the middle week of February 2024, at 80.6%, according to EIA data, compared with analysts’ expectations of an uptick to 81.5%, according to a Reuters poll.

BP’s 435,000 barrel-per-day (bpd) Whiting refinery in Indiana, the largest in the US Midwest, will return to full production capacity in March 2024, after a power outage since February 1.

“TotalEnergies’ 238,000-bpd refinery in Port Arthur, Texas, is also working to complete a restart, though it is still operating minimally following a weather-related power outage. The outages have drawn down distillate inventories, which include diesel and heating oil. Those stockpiles were down by 4 million barrels in the week to 121.7 million barrels, versus expectations for a 1.7 million-barrel drop,” Reuters reported further.

Volatility Strikes

However, oil prices registered a fall on February 26, extending losses on market views that higher-than-expected inflation could delay cuts to high-interest rates that have been capping growth in global fuel demand.

Brent crude futures fell 39 cents, or 0.5%, to USD 81.23, whereas US West Texas Intermediate crude futures (WTI) were down 34 cents, or 0.4%, at USD 76.15.

Despite the February 22 rise, Brent lost about 2% and WTI fell more than 3% on signs that the United States Federal Reserve was in no hurry to cut interest rates.

In fact, market sentiment appeared focused on higher-for-longer interest rate expectations that lifted the US dollar and pressured commodity prices, as per the observations of independent analyst Tina Teng.

A stronger dollar makes oil expensive for buyers with other currencies. Prices have been trading between USD 70-90 a barrel since November 2023 as rising supply and concern over weak Chinese demand offset OPEC+ supply cuts despite two wars raging in Ukraine and Gaza.

“The geopolitical risk premium on Brent crude from Yemeni Houthis on ships in the Red Sea remained modest at only USD 2 a barrel,” stated Reuters, while quoting Goldman Sachs analysts.

However, Goldman Sachs has raised its summer peak price projection for oil to USD 87 a barrel, up from USD 85, after Red Sea disruptions drew larger than expected draws in stocks held by developed countries.

The post Oil price volatility continues amid geopolitical concerns, interest rate worries appeared first on International Finance.

In a report published on December 17, Goldman Sachs’ analysts stated, “In 2024, we continue to anticipate range-bound pricing and very mild price volatility upside price movements should be limited by elevated spare capacity to handle tightening shocks.”

The investment bank has revised its forecast for Brent, which was earlier expected to average USD 92 per barrel to a peak of USD 85 per barrel in June 2024.

According to Goldman Sachs, the United States is the primary source of non-OPEC supply, indicating that there are multiple factors supporting US production that are expected to last until 2024.

Analysts revised their growth estimate for the United States’ total liquids supply in 2024 to 0.9 million barrels per day (mb/d) from 0.5 mb/d, predicting that the country’s Lower 48 crude output would reach 11.4 million mb/d in the fourth quarter of 2019.

The bank did point out that factors such as the decision by OPEC to curtail supplies, a rebound in China, restocking in the US, and a low probability of recession should limit the negative risk to oil prices.

“Saudi Arabia is unlikely to ‘flush’ the market in 2024”, analysts at Goldman Sachs stated, adding that “we expect full extensions of the OPEC+ cuts announced in April 2023 (1.7 mb/d) through 2025, and of the additional 2.2 mb/d package through 2024Q2.”

“We adjust our OPEC range trade to a short $70 put, long $80/90 call spread option on Brent Jun24, and still recommend long summer 2024 gasoline margins,” they concluded.

The post Goldman Sachs lowers Brent crude price projection due to high US production appeared first on International Finance.

Futures on Brent crude dropped 8 cents, or 0.1%, to USD 77.12 a barrel. At USD 72.19 per barrel, US WTI crude futures were down 13 cents, or 0.2%. In the previous session, both benchmarks closed at their lowest points since July 6.

The Organisation of the Petroleum Exporting Countries (OPEC+) and its allies, including Russia, have agreed to voluntary output cuts of roughly 2.2 million barrels per day (bpd) for the first quarter of 2024. However, the cuts have not been able to buoy market sentiment because there is uncertainty about whether they will be carried out in full.

The voluntary 1.3 million bpd reductions from Saudi Arabia and Russia are included in the cuts.

Market sentiment was not greatly affected by remarks made by Russian Deputy Prime Minister Alexander Novak, who stated that OPEC+ was “ready to take additional actions to eliminate speculation and volatility.”

Vladimir Putin, the president of Russia, is scheduled to visit Saudi Arabia and the United Arab Emirates soon.

The agenda of the talks is expected to include discussions about cooperation in the oil market. Fears regarding the state of China’s economy have also contributed to the bearish sentiment.

The outlook for China’s A1 rating was downgraded from stable to negative by rating agency Moody’s due to “increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector.”

China will release preliminary trade data to the public, including information on crude oil imports.

According to market sources citing data from the American Petroleum Institute, crude oil and fuel inventories increased in the US in the week leading up to December 1.

Crude stocks rose by 594,000 barrels, distillate inventories increased by almost 1.9 million barrels, and gasoline stockpiles increased by 2.8 million barrels.

The post China oil prices fall scepticism on OPEC+ cuts appeared first on International Finance.

The pipeline is ready for exports to start, according to Turkey’s energy minister. However, two senior Iraqi oil officials recently claimed that Iraq has not received official word from Turkey regarding the pipeline’s readiness.

Iraq, the second-largest oil producer in OPEC, exports about 85% of its crude oil through ports in the south. However, roughly 0.5% of the world’s oil supply still comes from the northern route via Turkey.

According to Reuters, a top energy consultant, Iraq was also awaiting discussions on “lingering financial and technical issues.”.

What Caused The Shutdown?

In 2013, the Kurdistan Regional Government (KRG), which is semi-autonomous in Iraq, started exporting oil on its own.

Through a KRG pipeline, KRG exports are transported to Fish-Khabur on the northern border with Iraq. From there, the oil enters Turkey and is transported to the port of Ceyhan on the country’s Mediterranean coast.

Iraq’s federal government claims that the sole entity authorised to oversee crude shipments via Ceyhan is the state-owned marketer SOMO.

Turkey closed the pipeline as a result of the federal government of Iraq winning the authority to manage to load at Ceyhan. If Turkey hadn’t received instructions from Iraq’s SOMO on ship-loading, the crude would have accumulated in storage with nowhere to go.

Following an arbitration verdict by the International Chamber of Commerce (ICC) on March 23, which mandated that Ankara pay Baghdad penalties for unauthorised exports between 2014 and 2018, Turkey stopped oil exports through Iraq’s northern oil export route. The action caused oil prices to drop to about $80 per barrel.

Turkey ceased pumping about 450,000 barrels per day (bpd) of Iraqi oil to Ceyhan through the pipeline on March 25. This included 75,000 bpd of federal crude and 370,000 bpd of KRG crude, according to a person with knowledge of the pipeline’s operations.

Matters Of Dispute

In 2014, Iraq moved for arbitration at the International Court of Justice (ICC) in Paris regarding Turkey’s facilitation of oil exports from Kurdistan without Baghdad’s federal government’s approval.

Iraq claimed that Ankara and Turkish state energy company BOTAS had broken the terms of a 1973 pipeline deal between Iraq and Turkey by moving and storing oil from Kurdistan and putting it on tankers at Ceyhan without Baghdad’s consent.

According to a person familiar with the case who spoke to Reuters in March, the International Criminal Court upheld Iraq’s claim to be in charge of loading at Ceyhan and to be able to monitor what was being loaded.

According to sources, Turkey was also ordered to reimburse half of the discount on KRG oil sales. According to the person acquainted with the issue, Turkey owes Iraq a net amount of approximately $1.5 billion before interest, based on multiple verdicts. A Turkish source said that Iraq had first asked for roughly $33 billion.

A second arbitration case covering the years 2018 through 2022 might take up to two years.

Following the court verdict, the governments of Turkey, Iraq, and Kurdistan have all issued statements; however, none of them have provided all the information on the ruling.

Furthermore, Baghdad is required by the treaty governing the pipeline to pump a minimum assured volume through it.

This might further complicate matters, according to an Iraqi official, and translates into a minimum payment to Turkey, regardless of the amount of crude that flows, as long as the pipeline is working.

The Pipeline Maintenance

Iraq said in May that Turkey’s request to inspect the pipeline and storage tanks for potential damage following a strong earthquake on February 6th coincided with the standstill in March.

While continuing their legal dispute over arbitration rulings, the two nations decided to hold off on resuming flows until after a maintenance assessment of the pipeline was finished.

Iraq filed a request to enforce the ICC arbitration ruling in April with a U.S. federal court. Ankara also declared last month that it was considering taking Iraq to court.

Turkey wants the U.S. lawsuit to stop, and one of the reasons Turkish President Tayyip Erdogan’s August visit to Iraq was postponed was the lack of progress in finding a solution to this problem.

Although there hasn’t been an official confirmation, sources have indicated that Erdogan will probably travel to Baghdad this month.

At a surprise industry gathering in Abu Dhabi on October 2, Turkish Energy Minister Alparslan Bayraktar declared that the pipeline’s maintenance was finished and that construction would resume within the next week.

Although officials have stated that conversations are continuing, Baghdad has not made any formal comments on the issue since.

The post IF Insights: Why isn’t the Iraq-Turkey oil pipeline functional yet? appeared first on International Finance.

The Joe Biden administration removed the majority of the six-month limitations on Venezuela’s ability to produce, sell, and export oil to specific markets. Some Venezuelan crude will again be available to consumers who were previously prohibited from transacting, thanks to the wide relaxation of sanctions that have been in place since 2019 in the wake of an election that Washington viewed as fraudulent.

The Office of Foreign Assets Control (OFAC) of the US Treasury issued the license with the intention of promoting a free and fair presidential election in Venezuela in 2024. However, it is not anticipated to instantly result in more exports or dramatically improve Venezuela’s declining oil production.

A large number of PDVSA’s highly qualified employees have left the trading business as a result of inadequate pay for oil traders.

According to experts, this loss of experience means that new discussions can take some time, or result in few new export deals in the six months of the license.

With the greatest crude reserves in the world, Venezuela currently produces 780,000 barrels per day (bpd) on average. The revisions to the license could help PDVSA generate more cash flow by removing some of the intermediaries who are selling its oil to consumers, primarily in Asia, at a discount.

“The OFAC has issued an unprecedented general license that suspends the broad siege imposed on PDVSA,” the company’s CEO and Oil Minister Pedro Tellechea said on social media, Reuters reported.

Under the license granted by OFAC, which is in charge of US sanctions, Venezuela is now able to get paid directly for goods or services.

The limitations on payment had diminished the earnings from sales to PDVSA and its joint companies, which were only permitted to ship goods to settle debt; cash transfers to Venezuela were not permitted. Some US sanctions against PDVSA remained in place.

Experts’ take on the matter

The easing of sanctions on Venezuela may not quickly expand its oil output but can boost profits by returning some foreign companies to its oilfields and providing its crude to a wider set of cash-paying customers, experts believe.

“This looks like a wide lifting of oil sanctions on Venezuela, which is surprising because the license is more expensive than expected,” said Francisco Monaldi, a Latin American energy expert with Rice University’s Baker Institute, while speaking with Reuters.

The Joe Biden government’s move is seen as a measure to ease high oil prices caused due to sanctions on Russia and OPEC output cuts. However, experts believe that Venezuela’s overall exports are unlikely to offset those global production cuts.

To once again become a relevant oil exporter, the Southern American country needs dozens of drilling rigs, billions of dollars in infrastructure replacements for refineries, flow stations and crude upgraders and a reliable power supply.

Venezuela can also inaugurate gas exports if United States-authorized negotiations with Trinidad and Tobago for joint offshore projects progress, while a portion of oil currently going to China can end up in the Caribbean if President Nicolas Maduro re-establishes the country’s Petrocaribe supply program.

Venezuela’s exports to China directly and through trans-shipment hubs have fallen to 437,000 bpd so far in 2023 from 477,000 bpd in 2022, according to vessel monitoring data.

“If Venezuela and China reach a pact to resume debt payments and expand joint oil projects, that could add some extra 100,000 bpd of output in the two-year period,” Monaldi remarked, while adding, “But if no sustained investment happens, it is difficult to predict overall output of more than 1.1 million bpd in the short and medium terms.”

The post Will Venezuela become oil biggie? As US lifts sanctions, experts weigh in appeared first on International Finance.

It did, however, add that the attacks lessen the possibility that the nation’s relations with Saudi Arabia will return to normal and that Saudi production will not increase as a result.

A day after Israel bombed the Palestinian enclave of Gaza in retribution for one of the worst strikes in its history, Hamas’ attack on Israel raised oil prices as markets priced in worries about a wider confrontation in the Middle East.

On October 9, Asian trading hours saw an increase of almost USD 3 in the price of oil, with benchmark Brent crude trading at about USD 87 per barrel.

However, the next day, the prices cooled down, as Brent crude, the key benchmark for Middle East’s oil producers, fell 0.2%, to USD 87.97 a barrel during early trading hours, while United States West Texas Intermediate crude slipped 0.2% to USD 86.22 a barrel.

Oil prices had tumbled around the last week of September 2023, as fears of a weakening global economic outlook spiked concerns of softening demand. Brent dropped about 11% and WTI dipped more than 8%, decline ratios that could not be managed to be offset by the market jumps seen on October 9.

Analysts are now unanimous in predicting that as the Israel-Hamas conflict gets deadlier, it will affect the global oil market movements too.

In its latest market note, Goldman Sachs stated that it still expected Brent to go to USD 100 by June 2024, noting that there hasn’t yet been any effect on current global oil production.

“Along with the decline in oil prices over the last two weeks and limited evidence for large draws in global commercial visible oil inventories over the past three months, this weekend’s developments reduce the probability of an early unwind of the Saudi production cuts,” the note stated further.

According to Goldman Sachs, the possibility of a short-term improvement in Saudi-Israeli relations is decreasing because of the rising confrontation. However, the bank continues to predict that Saudi Arabia will only gradually resume its additional 1 million barrels per day of production cutbacks by the first quarter of 2025.

According to the bank, its December 2024 Brent price projection would increase to USD 104 in a more probable scenario in which Saudi Arabia’s crude production remained constant at 9 million barrels per day.

The violence, according to Goldman Sachs, also increases the prospect of wider regional tensions increasing again, and the risks to its Iranian output predictions are now more pessimistic.

According to the report, the price of Brent oil at the end of 2024 would increase by a little over USD 1 per barrel for every 100,000 barrels per day decrease in Iran’s production in comparison to the baseline.

“The risk that this recent development transforms from a localized event to one that is prolonged and engulfs a wider range of nations should be among the key concerns for investors,” said Norman Villamin, Group Chief Strategist at Union Bancaire Privée (UBP) in a note on October 9.

“A prolonged conflict has the potential to draw in Iran and imperil the potential normalisation of Saudi-Israeli ties that are reported to be close to being announced,” he said.

“With Iranian exports and US releases from its strategic petroleum reserve having virtually fully offset Saudi supply cuts since September, a global response which reduces Iranian supply where Saudi Arabia does not compensate with increased production would create a renewed supply shock for global energy markets,” the official added further.

London-based consultancy Capital Economics told Zawya that the latest oil market volatility was not due to supply disruption, but the potential for it.

“Israel produces very little crude oil, but risks to production in the wider region are significant. These risks, unfortunately, become greater the longer the conflict goes on and if any other regional actors become embroiled in it. And they also come at a time when the global oil market already appears to be in a fairly large deficit,” the consultancy stated further.

The post Will Gaza conflict affect oil market adversely? Analysts answer appeared first on International Finance.

The price cap, imposed by the 2022 end, was seen as an effort intended to reduce Russia’s ability to finance its Ukraine adventure. However, in September 2023, Russia’s oil and gas revenues rose by around 15% from August to 739.9 billion roubles (USD 7.44 billion), as the growth ratio went up by 7.5% compared to the same month in 2022.

This figure now puts a question mark on the ‘success’ that the United States-led Western Bloc had by May 2023, in terms of achieving oil supply stability and reducing Russian tax revenue.

The Ground Situation

Russia’s main crude blend, Urals, broke through the G7 price cap on the open market in June 2023, and has since pushed above USD 80 per barrel till September 2023. As of October first week, it is currently trading at around USD 75 a barrel.

This has ensured that Moscow can financially sustain its Ukraine campaign for a longer duration.

The price cap of USD 60 per barrel came into effect on 5 December 2022, despite many countries expressing unwillingness to come to an agreement on a lower price cap.

The Western Bloc in September 2023, shelved plans of revising the price ceiling further. India and China, Moscow’s key allies and two crucial energy markets in the world, have been protesting the price cap from the very beginning and the OPEC (Organization of the Petroleum Exporting Countries) countered the G7 move by cutting the daily oil production ratio since 2023 beginning.

In fact, Russia’s seaborne crude exports rose by 10% in September 2023 to 3.37 million barrels a day, well above the pre-Ukraine war average of 3.1 million, according to the commodities giant S&P.

Has The Move Failed?

“The price cap has absolutely failed. Across the market we expect that all of the cargoes of Russian barrels are now trading above the price cap,” told Fotios Katsoulas, lead analyst for tanker shipping at S&P, while interacting with Politico.

As of October 2023, China, India and Turkey have reportedly become the largest destinations for Russian seaborne crude.

In September 2023, five European diplomats accepted that despite the growing awareness about the futility of the energy price cap, the Western Bloc is hardly showing any appetite to course correct.

Ukraine has been urging the West to tighten the price cap to just USD 30, apart from restraining Moscow’s allies from exporting refined Russian fuel to the global market. However, all these appeals have fallen on deaf ears.

How Russia Is Sidestepping The Sanctions?

In April 2023, the Centre for Research on Energy and Clean Air noted about five nations expanding their Russian oil imports and selling refined energy products to other countries. This move has directly negated the impacts of the G7 price cap on Moscow’s coffers.

These allies also increased exports of refined products to the ‘price-cap countries’ that sanctioned Russian oil, including the European Union, Australia, Japan, the United Kingdom, Canada and the United States.

“The EU, G7 and Australia continue to import Russian fossil fuels as refined oil products from third countries and allow transportation on their vessels and insurance,” the report stated further.

While the EU has been the largest importer of these refined products, countries like China, India, the United Arab Emirates, Turkey and Singapore increased seaborne imports of Russian crude oil by 140% since 2022, according to CREA. These nations, as of April 2023, were absorbing 70% of Russia’s crude oil exports.

These nations increased exports of Russian oil products by 26% to price-cap coalition countries. Their exports to non-price-cap countries rose only 2%, showing that the price-cap coalition countries drove the increase in oil-product exports from countries importing Russian crude.

The European Union, which has been vocal against Putin’s military campaign, spent some USD 19.3 billion on products from the countries sourcing the most Russian crude oil in the 12 months after the war’s beginning, CREA disclosed.

Let’s discuss Russia’s ‘Dark Fleet’, which has emerged as Moscow’s other key weapon to neutralise the adverse effects of the West’s energy price cap.

In July 2023, Michelle Wiese Bockmann, a senior analyst at Lloyd’s List Intelligence, spotted a cluster of 43 oil tankers jostling in international waters off the coast of Malaysia in November 2022. These vessels, which were 20 years old on average, had unknown owners and insurance statuses. What Michelle was referring to as a ‘Tanker Traffic Jam’, was basically part of the Russian ‘Dark Fleet’.

In December 2022, Europe stopped importing Russian oil and petroleum products, apart from capping crude prices at USD 60 a barrel as part of its economic sanctions. By March 2023, G-7 imposed another price cap. Meanwhile, Russian oil ditched Europe and entered the Asian market.

The means to achieve this feat was indulging in ‘Deceptive Shipping Practices’ like hiding their location, frequently changing flags, or obscuring their ownership structure. Singapore has reportedly emerged among the top three ports of origin for ‘Dark Fleet Ships’.

US Treasury Secretary Janet Yellen has now admitted that the recent market prices for Russian oil showed that the price cap was no longer working as the West hoped.

Although Moscow’s March 2023 energy income dropped by 43%, immediately after the price cap kicked in, the latest September figures suggest that this ‘Revenue Drop’ has become a thing of the past.

The Road Ahead

In August 2023, Ural oil (the Russian benchmark) averaged at USD 74 a barrel, already well above the G7 price ceiling of USD 60. The price difference between European Brent and Ural crude has also narrowed down rapidly.

In December 2022, when the original price cap came into force, the European Union, as a bloc, reportedly promised to review it every two months, as per the market situation. The United States, Canada, Japan, the United Kingdom and Australia have instead decided not to set any regular review.

While there were reports about a ‘Review Meeting’ being held in June/July 2023, it was never done. As per Reuters, there is a difference of opinion among the EU members on whether to lower the price cap threshold. Even the G7 is not showing intention to economically punish Russia further.

Has the ‘Energy Price Cap’ served its goal of putting pressure on Russia’s exchequer? The answer is no. Blame the lax enforcement and difference of opinion here.

The post IF Insights: An honest take on the ‘success’ of G7 price cap on Russian energy trade appeared first on International Finance.

Russian oil producers have found ways to sell their product, while using fewer Western ships and insurance services, thus making it difficult for the West to enforce the existing price cap because the companies facilitating the trade were outside of their remit.

The G7 countries along with the European Union and Australia imposed the price cap mechanism on Russian oil in December 2022, followed by a cap on fuel from February 2023, to punish Moscow financially for its Ukraine adventure.

Initially, European Union countries agreed to review the price cap every two months and to adjust it if necessary while the G7 would review the measure “as appropriate” including “implementation and adherence.”

The G7 has not reviewed the cap since March 2023, as per the reports and four people familiar with the intergovernmental political forum’s policies, told Reuters that the group had no immediate plans to look into adjusting the scheme.

“There were some talks in June or July to do a review, or at least talk about it, but it never formally happened,” one diplomatic source said, while adding that some European countries were keen for a review of the price cap. Also, on the other hand, there is “little appetite” from the United States and G7 members to make changes in the particular policy.

The mechanism currently allows third countries to buy Russian fuel using Western ship insurance if there is proof that the purchase does not exceed price limits of USD 60 per barrel for crude, USD 45 per barrel of heavy fuel and USD 100 per barrel of light fuel.

Benchmark Brent oil futures have been trading at their highest in 2023 at above USD 90 a barrel, raising the value of global crude, including Russian Urals. Russia’s finance ministry has already said that the average price of its flagship crude grade Urals recovered to USD 74 a barrel on average in August 2023, well above the USD 60 a barrel cap, and up from an average of USD 56 in the first six months of the year.

Russia was forced to cut exports of oil (one of its revenue generation sources) immediately after the price cap was imposed as Moscow struggled to find enough ships to transport all of its output. However, the country eventually channelled most of its exports into the hands of domestic or non-Western foreign shippers, which do not require Western insurance coverage.

“At least 40 middlemen, including companies with no prior record of involvement in the business, handled at least half of Russia’s overall crude and refined products exports between March and June. While mostly ‘dark fleet’ of tankers with murky ownership was being now used to transport Russian crude, Western ships were still involved in moving products since those were harder to police, an industry source said,” commented the Reuters report.

According to the London Stock Exchange Group’s data, Russian crude has been trading above the cap since mid-July and is being traded at around USD 67 a barrel at Russian crude terminals. Russian refined products like fuel oil and diesel also surpassed their price caps.

Meanwhile, the crude oil price scaled to new heights during the first week of September as traders and hedgers weighed production cuts and a continuing run down of existing stockpiles.

Saudi Arabia and Russia have already committed to maintain their production cuts through to the 2023 end, thereby giving way to a potential supply squeeze which is pushing the prices higher.

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