Russia’s reaction to the cap and embargo has been predictable, with Kremlin spokesman Dmitry Peskov saying Russia would not accept the cap or sell oil to anyone who complies. Russia has said it will redirect supplies to “market-oriented” partners or simply reduce output.
Acquiring and operating a fleet of tankers and diverting oil that used to go to Europe to more distant Asian markets – China and India have been the largest buyers of Russian oil since the invasion, more than tripling their purchases – yet , will significantly increase Russia’s costs and reduce net income from oil sales.
The initial reaction to the introduction of the cap and embargo saw oil prices soar from just under $86 a barrel to just over $88 a barrel.
The direction of oil prices – and Russia’s net income from the inevitable decline in oil sales – will be largely influenced by the state of the global economy, especially in the US and China.Credit:Bloomberg
However, oil prices fell back below $83 a barrel after stronger-than-expected U.S. services sector data raised concerns that the U.S. Federal Reserve will have to continue raising U.S. interest rates in a more aggressive manner than financial markets had previously considered.
The direction of oil prices – and Russia’s net income from the inevitable decline in oil sales – will be largely influenced by the state of the global economy, especially in the US and China.Further sharp U.S. rate hikes could lead to recession, while China’s outlook is clouded by growth A chaotic response to the COVID outbreak.
After the highly unusual recent wave of protests in major cities, China does appear to be relaxing its draconian zero-COVID approach, even as new outbreaks are spreading.its economic prospects still weakwhich will limit demand for oil even if early signs of major changes in COVID policy are confirmed.
Russia may be the biggest loser in the long run from its decision to invade Ukraine, but the unpleasant aftershocks of the invasion will reverberate through global energy markets for years to come.
There was a lot of debate before the decision was made to set a cap at $60 a barrel. Some countries, such as Poland, want to set the price of oil at $30 a barrel, effectively crippling Russia’s oil revenues and its economy and ability to fund wars. Others want to raise the cap to ensure oil continues to flow, minimizing damage to already weak Western economies.
How much damage the cap does to Russia or the West may depend on OPEC’s actions.
Members of the OPEC+ cartel, which includes Russia, decided over the weekend to maintain current production quotas, including the 2 million barrels per day cut agreed in October, while they wait to see the impact of the embargo and price caps.
If OPEC further cuts production, oil prices will rise and the effectiveness of the cap and Russia’s response to it will be tested.
Energy markets may never be the same.Credit:getty
An increase in OPEC output is unlikely (barring an unexpected surge in global economic activity), but if oil prices fall further, assuming China and India are able to get a discount of $25-$30 a barrel from Russia to maintain crude supplies, Russia’s revenues will be severely affected shrink.
The lessons Europeans learn this year when Russia uses their energy dependence against them will have lasting effects on energy markets.
As a response/consequence to Russian restrictions on gas sales to Europe, EU economies have reduced their demand for gas by around 25% and are scrambling to source supplies from Russia at high cost and with significant impact on LNG prices. International markets are also dampening demand.
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The knock-on effect of European demand redirection is being felt across the Asia-Pacific region (the largest LNG market) and has sparked a difficult debate All about natural gas prices and availability in Australia.
Given that Europe will not resume its overreliance on Russian gas even if the war in Ukraine is eventually over, new demand for LNG will become a permanent feature of a very tight supply-demand market, with long lead times and high costs for new supplies . High oil prices will not be a short-lived phenomenon.
Likewise, Europe will diversify its oil supply, which will have an impact on overall demand for oil, but also on the geography of supply and demand.
Russia may be the biggest loser in the long run from its decision to invade Ukraine, but the unpleasant aftershocks of the invasion will reverberate through global energy markets for years to come.
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