March 27, 2023

How effectively can Russia bypass the G7’s new oil price ceiling? |

Setting a price ceiling for oil coming from Russia – which was decided by senior officials of the governments of the G7 countries last week in Washington – is even more difficult than usual in the current oil market and geopolitical situation. The unofficial oil Price range 40-75 dollars Brent per barrel (pb) for most of former US President Donald Trump’s tenure was controlled by a combination of several threats (e.g. Withdrawal of the US Army About Saudi Arabia and its demise NOPEC legislationmainly) and rewards (ongoing a guarantee of safety Saudi Arabia and US corporate investments in the country), as I have analyzed in full the latest book on the oil market. At the time, however, Saudi Arabia was not the leading nuclear power in the midst of an attack on a major European country launched by a president who had personally staked everything on its success. Financially, the stakes are also related to the previous one de facto the oil price range was not as complex as it is now, when a seismic shift was planned to wean Europe and other powers off cheap Russian energy, but it still needed time. The world’s major economies are already dealing with the inflationary effects of high energy prices, catalyzed by Russia’s invasion of Ukraine in February, and interest rate hikes that are restraining the economy are now adding to the negative economic pressure from the end of various quantitative easing measures. in use after the great financial crisis. Therefore, on the one hand, the last thing the major economies of the G7 now want is for this to be exacerbated by a huge drop in Russian oil and gas supplies during this transition process, but on the other hand, they are very aware that every dollar added to the price at which Russia can to sell its oil and gas means it can stay in Ukraine longer and kill more Ukrainians. It also means that Russian President Vladimir Putin’s personal stakes will continue to rise, which in turn will increase the chances of a wider escalation into nuclear warfare as he realizes that he faces guaranteed failure in the war.

Related: Deep OPEC production cuts boost Biden’s bid to lower oil prices

In this delicate balancing act, US Treasury Secretary Janet Yellen acknowledged that a price ceiling in the $60 WTI range would encourage Russia to continue producing oil and would be equivalent to around $68 Brent given recent US history. $8 pb premium for Brent over WTI. The final price ceiling for oil coming from Russia will be decided by December 5, when the European trade embargo on Russian oil and the related marine oil transportation and insurance restrictions will come into force.

Given the obvious ideological dichotomy in the concept of this oil price cap, it is by no means certain that it will be strictly enforced. In other words, since the G7 doesn’t want to stop all oil exports from Russia, but rather just limit how much revenue it can get from each barrel, the question for global oil markets remains, how much oil can Russia export even with a price cap in play? In the broader oil market, this is a key figure as Russian oil exports leaking into the world market above the oil price ceiling feed into the global mix of oil supply and demand, which in turn affects prices. The answer to this question largely depends on shipping and the Russia-Iran-Iraq-China corridor.

First, there is the question of how many ships Russia can secure to transport its oil. A number of leading oil industry sources in the fields of energy security in the United States and the European Union, speaking exclusively to them believed last week that Russia could very quickly secure at least three-quarters of the supply needed to move its oil to established buyers as usual, and up to 90 percent within weeks after that. Before the invasion of Ukraine, according to IEA data, Russia exported to Europe about 2.7 million barrels per day (bpd) of crude oil and another 1.5 million barrels per day of petroleum products, mainly diesel. More broadly, at the end of January this year, also according to the IEA, Russia’s global oil exports were 7.8 million barrels per day, of which two-thirds were crude oil and condensate. Therefore, using the range of likely scenarios above, the global oil market would lose only 0.78-1.95 million barrels per day from pre-invasion Russian oil levels, even with the cap in place, regardless of all other factors. Considering the huge fleets of oil tankers operated by Russia itself, China, India and Iran, it would have no shortage of ships at its disposal, and the commonly mentioned “problem” of maritime and cargo protection and indemnity insurance would be easily enough to cover all the mentioned countries, as when the US put such ​​ship insurance sanctions on Iranian oil tankers

Second, the Russia-Iran-Iraq-China corridor also provides several other mechanisms for moving oil under the sanctions environment. Iran, colluding with Russia and China and using Iraq as a conduit when necessary, has had no choice but to develop its own means of circumventing sanctions since 1979, when it has become so adept that it is a matter of national pride. the highest levels. In December 2018, at the Doha Forum, then-Iranian Foreign Minister Mohammad Zarif stated that: “If there is an art that we have developed in Iran, [that] We can teach others at our own cost, it’s the art of evading sanctions.” In late 2020, then-Iranian Oil Minister Bijan Zangeneh himself added a small detail to one such proven method: “What we export is not in Iran’s name. The documents are exchanged over and over again [the] technical information.”

As also analyzed in full by me the latest book on the oil market, shipping-related means to circumvent the sanctions are simple enough and involve disabling the “automatic identification system” of ships carrying Russian oil – literally just flicking a switch – as is simply lying about the destinations on shipping documents, as Zanganeh mentioned. . In Europe, Iran used this method to get oil to some of the less tightly controlled ports in southern Europe that require an oil and/or oil trading commission, including ports in Albania, Montenegro, Bosnia and Herzegovina, Serbia, Macedonia, and Croatia. From there, the oil was easily transferred to major oil consumers in Europe, including through Turkey. For shipments to Asia, the reliable method of Iranian sanctions oil, which is also available for Russian oil, has allegedly contributed to Malaysian (and to a lesser extent, Indonesian) oil exports to China, and eventually China-bound tankers have participated by sea. or transfers of Iranian oil out of port to tankers sailing under other flags.

At this point, it is appropriate to note that there are several Russian crude oil grades, which are also extremely close in characteristics to the corresponding grades of Iran and therefore Iraq. Iran has many large oil reserves and fields. If the G7 decided to tighten its sanctions against Russia’s oil exports, Moscow and Tehran could agree on some sort of swap agreement whereby Russian oil would go wherever Iran needed it, and the compensatory amount of “Iraqi” (read “Iranian”) oil would go where Russia wanted because Iraq’s oil is not subject to any sanctions. This nuclear strategy of “rebranding” Iranian oil as Iraqi oil has seen huge volumes of Iranian oil moved through Iraq’s existing crude oil export infrastructure, including very large crude oil tankers loaded in and around the southern export hub of Basra. It has also been made directly to southern Europe via the Turkish port of Ceyhan through crude oil pipelines that pass through Iraq’s semi-autonomous Kurdistan region, although there are continuous disturbances years, and there are also plans more pipelines from Iraq to Jordan and Syria. understands from sources close to Iran’s oil ministry, who spoke exclusively last week, that there was a “significant change” to this previous long-standing agreement to limit crude oil flows from Russia, Iran and Iraq, whereby Russian oil exports were prioritized over exports from Iran/Iraq to Europe The recent trip of the Russian Deputy Prime Minister, Alexander Novak. “The basis for a new arrangement for crude oil flows from Russia/Iran/Iraq was laid in January [2022] meetings [in Moscow, when Iranian President, Ebrahim Raisi – the first visit of an Iranian president to Russia in almost five years at that point]and were discussed further in the last couple of weeks,” a source told

Simon Watkins for

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