The global oil market as a concoction. Over the past weekend, the G7, the organization of industrialized countries, announced that together with the European Union and Australia, they will impose a new global limit on the purchase of oil from Russia – a price ceiling of $60 per barrel.
● Russia will rely on a “shadow fleet” to continue exporting oil
● Globes’ 40 promising young people project: registration opens
● Liquid and protects against inflation: the financial product that became a hit and raised NIS 6 billion this month | Globes test
This is a reactionary measure aimed at, on the one hand, harming the income of Moscow, which in October took care of cutting the production rate of OPEC Plus, and tightening the pressure on it following the invasion of Ukraine, and on the other hand, not to cut off all at once the European Union countries that are still dependent on Russian oil.
If that’s not enough, voices are heard in China that the regime will be forced to loosen the corona restrictions, which will increase the demand for the black gold. The big question is what will happen to prices? Analysts are divided, and the range of predictions is wide. Globes is in order.
What is the new restriction imposed on Russia and what is the purpose?
About nine months after the outbreak of the war in Ukraine, the European Union, the G7 countries and Australia agreed to implement a ceiling price for Russian oil, which is supposed to harm the country’s income from energy exports – and thereby harm its war efforts. The mechanism is accompanied by an embargo on the purchase of Russian oil in tankers (as opposed to oil delivered through pipelines) by the G7 countries (USA, Canada, France, Great Britain, Germany, Italy and Japan), the European Union and Australia.
According to estimates, last year Russia earned close to 70 billion euros from oil exports alone, and is expected to earn close to 180 billion euros this year from energy exports, including natural gas and coal. In fact, although it faces disruptions in the markets for which it served as a leading energy supplier due to the sanctions, Russia’s energy revenues are expected to break records in 2022, due to high energy prices.
Until now, most of the Russian energy sector has been exempted from significant sanctions, which has helped Moscow cope well with the sanctions. Along with exporting fossil fuels, Russia continues, for example, to export uranium and nuclear fuels for use in power plants in the West.
How will the mechanism work?
The countries determined that globally, it will be prohibited to purchase Russian crude oil at more than 60 dollars per barrel. The mechanism takes advantage of the fact that a large part of Russian oil exports is done in tankers owned by companies operating in the G7 countries and the European Union, and that the insurance is also done by Western companies.
As part of the new mechanism, insurance companies such as the British “Lloyd” and others will not be allowed to insure tankers carrying Russian oil purchased at a price higher than $60. On top of that, European or non-European shipping companies that are caught being part of a transaction that violates the price ceiling mechanism – will be suspended for 90 days from doing business within the European Union.
If there is a Western embargo on Russian oil, why is there a price ceiling?
The price ceiling mechanism is designed to lower the price of Russian oil globally, by “helping out” countries that still buy oil in tankers from Russia, such as India, China and Turkey, or smaller countries. These will be able to use the set threshold to improve positions, and purchase it at lower prices.
How effective will the mechanism be?
The answer to this is not clear, and at least in Ukraine it is estimated that it is not. The bloc of anti-Russian countries within the European Union pushed for a lower ceiling price, since $60 is roughly the current market price of Russian oil. Poland demanded a ceiling price of $30, but finally agreed to the set price, among other things after it was promised that additional sanctions would be adopted soon.
However, the mechanism adopted could allow the price of the roof to be further lowered in the future. It was also determined that the price could undergo adjustments that would ensure that it would be kept at 5% below the market price. Ukrainian President Volodymyr Zelensky defined the ceiling price set as “inadequate”, and said that it would not significantly affect Russian exports. On the contrary, according to an analysis by Bank Leumi economists, this price leaves Russia with the viability of selling oil. This is in accordance with the International Monetary Fund’s assessment that the “break even” price of Russian oil is around 30-40 dollars per barrel.
Commentators have pointed out that the suspension of companies that trade at a price higher than the ceiling price for only three months will harm the implementation of the mechanism, because the “price” for violating the sanctions may be commercially acceptable.
The one who demanded the step was Greece. Greek shipping companies own the largest fleets of tankers used to export Russian oil today. According to an analysis by the Nikkei agency, in the six months following Russia’s invasion of Ukraine, 41 Greek tankers transferred oil from a ship arriving from Russia to a ship off the coast of Greece. This, compared to only one last year.
What is Russia’s response?
Russia and its President Vladimir Putin have recently spoken out strongly against the price ceiling mechanism, threatening to stop supplying oil to any country that would be part of the global agreement. That is, also to Hungary and Slovakia, for example, which receive it through a pipeline.
Vladimir Putin President of Russia / Photo: Shutterstock, 42nd Street in Manhattan
What is the last decision made by OPEC plus countries?
The companies of the expanded oil cartel OPEC Plus decided on Sunday to leave the reduced production rate in place. The reason is, apparently, that the expectation was that oil prices would soar in the last month, but in reality oil prices have fallen. This, after they announced in October a production cut of two million barrels per day, 2% of global output.
US President Joe Biden threatened in response to a move by OPEC Plus designed to raise oil prices, which dropped from $120 per barrel in the summer to around $85. The surprising drop in oil prices was influenced by the drop in demand stemming from three factors: fears of a worldwide recession, the repeated corona shutdowns in China and the effects of the US central bank raising interest rates to 4%.
What is the reason that precisely China influences the entire oil market?
China is a significant importer that in 2021, for example, will alone import 22.3% of the world’s crude oil. Therefore, when Beijing decides to impose repeated closures on large areas of the country – it actually affects the demand for oil all over the world.
Those who are most affected by the decline in China’s oil demand are precisely the two largest producers in OPEC Plus, Saudi Arabia and Russia. In November, China imported 1.9 million barrels per day from Russia – an increase from 1.82 in October. At the same time, imports from Saudi Arabia amounted to 1.72 million barrels per day, down from 1.87 in October.
What are the estimates regarding oil prices?
Analysts find it very difficult to estimate what the future price of oil will be, so you can see quite large gaps in the estimates. Today, the price of a barrel of Brent is about 87 dollars.
Bank Leumi estimates that the price of a barrel of Brent in the coming period will hover around 90 dollars, and during the next year will drop to 85 dollars. “In the short term, as long as global growth continues to moderate, it seems that the OPEC Plus group will cut production quotas, in order to prevent sharp drops in the price of oil,” write the bank’s economists, Dr. Gil Befman and Benyo Bolotin.
They add that the process of releasing oil from the US strategic reserve, a step taken by President Biden following the OPEC Plus production cut, is planned to be completed by the end of the year. Washington is even planning a renewed increase in stocks in the future, after the price has dropped to close to 70 dollars per barrel, which creates a “floor for the price”.
On the other hand, at the end of the week Bank of America published a review for investors, and estimated that the black gold may even reach about 110 dollars per Brent barrel next year. This forecast stems from the situation in China, and the bank estimates that it will be forced to open the economy and remove some of the corona restrictions in the shadow of the demonstrations taking place in the country – thereby significantly increasing global demand.
How will this affect the companies traded in Tel Aviv?
Liran Lublin, director of the research department at the IBI investment house, explains that the volatility in the oil market also has an effect on the energy companies traded in Tel Aviv. For the most part, the effect is not immediate, and as the price of oil rises, it will contribute to their profitability, and vice versa.”
Other companies that are traded in Israel, but most of their operations are overseas – such as Navits or Delek Group’s Ithaca, according to him, “are more affected by the current oil prices and not long-term prospects that provide certainty, as is the case with gas reservoir operations in Israel.”
Lublin concludes that the reality of the oil market leads to investors demanding a premium for the uncertainty. “Volatility also affects asset prices. There are geopolitical issues here, and it’s not just natural demand and supply. In a situation of uncertainty, the market wants an uncertainty premium and prices assets accordingly.”