Yves here. In 2008, it was possible to make an accurate call that oil prices were excessive. Here, there are too many factors in play to make a highly confident call. A huge wild card is demand from China. Western pressure for China to drop zero Covid was based on the belief that ending Covid restrictions would reduce supply chain interruptions. The upsurge in Covid and possibility of continuing high infections and/or long Covid-induced labor force reductions may prove this assumption to be false.
Another big wild card are the various Russia oil-related sanctions. The EU is supposedly barring all Russian oil as of February 5. Yet the G-7 and friends want to have it both ways by imposing an oil price cap. Russian oil is OK as long as purchased below the cap pursuant to the cap.
Russia is not playing ball. Even if its price to a particular buyer is below the oil price cap, Russia has said it will not sell oil to any country that seeks to impose non-market prices. The Kremilin is expected to announce its response this week.
Based on current information, if those countries need Russian oil, it will wind up being laundered through intermediaries who will get a markup.
We’ll know better in coming weeks how this dynamic plays out. But it appears that demand destruction, as in business closures and reduced activity, are making the oil price situation look less bad than it would be otherwise.
By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at Oil Price
- The EU embargo on Russian crude oil came into effect on December 5th and its embargo on oil products will come into effect on February 5th.
- Alexander Novak, Russia’s deputy prime minister, believes Europe will struggle to replace Russian fuel and will probably ask for exemptions.
- The IEA has forecast intense competition for non-Russian diesel barrels and says that product flows from Russia to Europe have surged.
Europe will find it difficult to replace Russian crude oil and product supply once the full effect of the EU embargoes on Russian petroleum products is felt, according to Russian Deputy Prime Minister Alexander Novak.
“Europe used to be a key market for the sale of our oil products. Let us wait and see which decisions they will make in the long run. So far, we don’t know what may substitute for our fuel,” Novak said in an interview with local news agency TASS published on Sunday.
Some EU member states could request to be exempted from the embargo on seaborne imports of Russian oil products, the top Russian energy official said.
“Probably, they will resort to exemptions, like it was with oil, when the restrictions did not apply to pipeline supplies, refineries in Bulgaria, the Czech Republic, and Slovakia. Even Germany and Poland, who declared their refusal from Russian oil, have applied for it for 2023,” TASS quoted Novak as saying.
The EU embargo on imports of Russian crude oil by sea came into force on December 5, while the embargo on seaborne imports of Russian oil products will take effect on February 5.
Although the EU embargo and the EU-G7 price cap on Russian crude oil at $60 per barrel didn’t immediately roil the oil market – although traders were concerned about a possible demand hit from slowing economies – uncertainty is growing over how the bans on Russian imports will affect supply balances over the next few months.
As the EU embargo on imports of Russian diesel enters into force, “The competition for non-Russian diesel barrels will be fierce, with EU countries having to bid cargoes from the US, Middle East and India away from their traditional buyers,” the IEA said in its monthly report in November.
In the December report, the agency said, referring to Russian exports, “Crude oil loadings were unchanged on the month at just over 5 mb/d, despite a 430 kb/d drop in shipments to Europe. By contrast, product flows (in particular of diesel) surged, including to Europe.”
And just to help things along, the Ukraine has announced that they are hiking their transit fees for Russian oil running via the Druzhba pipeline through its territory to the EU on January 1.
‘It is expected that Kiev will increase tariffs for transporting crude to Hungary and Slovakia by €2.10 per ton to €13.60 ($13.90), bringing the total hike to 18.3%.’
It’s not the first fee hike either-
‘Ukrainian oil transit fees have already been raised twice this year. The last hike in April reportedly brought the total increase to 51% on an annual basis.’
Putin bans all oil sales to ‘price cap’ states —
President Vladimir Putin on Tuesday signed a decree on retaliatory measures to the West’s price cap on Russian oil exports. It comes in response to the measure from the EU, G7 countries, and Australia, which took effect earlier this month.
The presidential decree bans the supply of oil and petroleum products from Russia to countries which apply a price cap in contracts. It also prohibits deliveries if the contracts directly or indirectly specify the cap.
If there’s a shortage, people are usually willing to pay more per pound or gallon, or pint. Sometimes the total cost is higher, sometimes less is bought, but businesses still have the fixed cost expenses, so both parties can lose out.
The unfounded attacks by Western governments have forced investment in Oil/Gas and Coal exploration and development to drop over the last 15 years. This has caused production to eventually drop, hence the rise in fuel prices without any corresponding response by the producers to increase investment.
Illogical decisions by governments have created spikes in prices and, for a very short time, even a negative price for oil. Because of port congestion, offloading was delayed, yet the tanker had been contracted to be elsewhere to take on oil, with penalty clauses if they were late, so they sold it cheap, so cheap that the price was negative!
Currently, governments want all the oil/gas they can get, yet want the industry completing a shutdown in 10 to 15 years time, while it can take 10+ years for a project to make a profit. It’s not the way to make your country prosperous.
And if petrol/diesel are not being sold, how will the other oil fractions be affordable, with the oil company making a profit. There’s the heavy oils used for surfacing roads and the thick gooey mess that’s the feedstock for so many pharmaceuticals.
These problems just aren’t problems if you are an Energy Minister with no knowledge of Industry or STEM subjects. :)
So much for the Super Intelligent Generalists.
I had already reported on what was happening with the Rosneft refinery in Schwedt. Here is an update that is topical with the above article. All my references are in German.
1. Schwedt is a refinery in Northeastern Germany, processing Russian oil, coming through the Druzhba pipeline, into a whole range of products. It represents 11% of the refinery capacity in Germany.
1.a) In September, in the wake of sanctions affecting firms like Gazprom and Rosneft, Germany took the refinery into fiduciary administration.
1.b) The paramount issue is how to secure the supply of oil to the refinery, so as to ensure continued production and maintain employment. The question is all the more burning in view of the looming embargo on Russian oil.
2. A solution is to supply the refinery with seaborne oil, unloaded in the harbour of Rostock and then carried over a 200km pipeline to Schwedt. But there are problems:
2.a) The pipeline was designed to carry refined products from Schwedt to Rostock, not raw oil in the reverse direction. Using it for this purpose is feasible after some technical adjustments.
2.b) The refinery processes 11.5M tonnes of oil per year, whereas the pipeline can only transfer 6.8M tonnes of oil per year. This is insufficient to reach an economically viable load of the refinery.
2.c) Worse, the pipeline was put in service in 1969, and because of its age cannot operate safely with the maximum throughput on a sustained basis. Overhauling it would take a couple of years at a cost of €400M.
2.d) And to top it all, tankers of the larger dimensions cannot berth in Rostock. It would be necessary either to extend or remodel the harbour (which will take years), or to rely upon smaller tankers. But then, a couple of them would be required — per week. It is unclear whether such a fleet can be arranged.
3. So on to Plan B: seaborne oil delivered to Gdansk and sent via another existing pipeline to Schwedt. The refinery has already been receiving small quantities of oil via this route.
3.a) Gdansk is a larger port with a substantial oil terminal, that is already tasked to supply crude to two other refineries (one in Poland, the other in Germany) through a network of pipelines.
3.b) The Poles have declared that they can provide Schwedt with the necessary oil to ensure the required production workload. But there are hurdles.
4. Poland refuses to supply Schwedt as long as the refinery belongs to Rosneft.
4.a) As a consequence, the German government seems set to expropriate the refinery once the fiduciary administration is over (in March 2023).
4.b) Rosneft has anticipated that move and already written off €1B from its assets in Germany. At this point, it is unknown what other actions (especially legal ones) it might take once the expropriation is official.
4.c) Even then, there are major doubts about what Poland will actually supply: it has not formally committed to a supply schedule, and the deliveries to the other two refineries take precedence anyway. This would leave just 3M tonnes oil for Schwedt — far short of the requirements.
5. Fortunately, there is Plan C: buying crude oil in Kazakhstan, delivered via the Druzhba pipeline to Schwedt. The scheme has been put forward by Michael Kellner, a Green member working in the government (Staatssekretär) under the minister of economy and party colleague Robert Habeck, and in charge of the Schwedt dossier.
5.a) This is feasible because the oil pipelines of Kazkhstan and Russia are well interconnected.
5.b) The Kazakh government expressed willingness to supply Germany with crude oil. The administration of the Schwedt refinery has already reserved pipeline capacity for the deliveries from January onwards.
5.c) However, there are some doubts about the scheme, because the German government has been remaining quite vague about deadlines.
6. Enter Christian Görke, Green member of the German parliament, who travelled all the way to Kazakhstan in order to clarify things. He came back from his trip even more worried than he was before.
6.a) Görke met with the deputy minister of energy, the general manager of KazTransOil, and the chairman of KazMunayGas.
6.b) The Kazakhs reiterated their readiness to sell oil to Germany. They would start in January 2023 with a test phase of 20000 tonnes per month, rising up to 5M or 6M tonnes per year when everything goes well.
6.c) There is just a hitch: nobody from the German side entered negotiations with Kazakhstan. In fact, the Kazakhs do not even know who is supposed to buy the oil and who their counterparts would be — the government, the Bundesnetzagentur, or Rosneft itself?
On his return, Görke’s message to his party colleagues in the ministry of economy has been a polite “what the hell are you doing?” — noting that neither Kellner nor Habeck ever bothered to travel to Kazakhstan for negotiations.
But there is worse.
7. The Druzhba pipeline serves to supply crude oil to both Poland and Germany.
7.a) As is usual in the energy market, the oil is delivered to both countries under a long-term “take-or-pay” agreement, meaning that customers must pay for the quantities agreed for, whether they actually collect them or not.
7.b) With the embargo on Russian oil, Poland is unhappy about this situation, as it must still pay for oil that it refuses, or is no longer allowed to collect.
7.c) Poland is now pushing the EU to impose sanctions on the Polish-German segment of the Druzhba pipeline. This would allow Poland (and Germany) to exit the contract with Rosneft without penalties.
7.d) However, this would also imply that the section of the Druzhba pipeline located in the EU would become legally unusable (and also technically, since Russia controls the inputs). Which also means no Kazakh oil for Schwedt. Back to point 1.b) above.
8. All that uncertainty is not going down well in Germany.
8.a) The regional authorities of Brandenburg (Schwedt is part of that Land) are getting increasingly alarmed. They had already exhorted the German government in June to take adequate measures, but so far nothing has been achieved. Fears regarding unemployment and a possible economic shock because of a lack of refined products are mounting.
8.b) The employees and the local population have been protesting repeatedly, basically demanding a return to the status quo ante, i.e. no sanctions against Rosneft and a secure supply of oil to the Schwedt refinery. Kellner has been dismissive, accusing the protesters of right-wing extremism, and of lacking solidarity with Ukraine. This attitude has not endeared him to the inhabitants of Schwedt.
8.c) Amongst the Greens, there is some trepidation: they are losing credibility as a competent government party because of the lackadaisical handling of the Schwedt affair by Habeck and Kellner.
Through ignorance of engineering and logistical issues, indifference to the mechanics of contractual agreements, and the lack of foresight, the German government has managed to put the country in an inextricable situation that will exacerbate supply chain shortages and inflation, for consumers and industry alike.
Sorry if this was a bit long.
“Sorry is this is a bit long.” Gosh, vao, how else to detail the complexity of our energy supply chains?
Reading through, I am by turns, terrified, bemused and enlightened. At the ease by which national governments expropriate corporate ‘property;’ good when Germany does it to Russian companies but bad when done to US companies. At the sheer size and complexity of the world’s energy infrastructure; and at its innate fragility.
And suffering from the cognitive dissonance of switching between fighting to the death over our ‘right’ to unimpeded access to fossil fuels and the realization that continued use of this energy source could be the death of much of humanity.
So, vao, thanks for your willingness to unpack these mysteries.
Fascinating. Thank you!
The German Greens have definitely proven that they do not care one whit about the environment: coal usage is up since September, which is absolutely wonderful if one wants to reduce CO2 emissions. Shipping oil from Russia to India to Europe further increases CO2 emissions.
The attack of hords of “wide-eyed idealists”!
Flee from these entities with glowing faces and sparkling eyes…..
Thank you. This is fascinating. True elite incompetence.
If you want another example of ineptitude paired with intransigence, look at Finland.
Apart from refusing to pay electricity from Russia, embargoing Russian oil and gas, suspending railway communications with St.Petersburg and even attempting to confiscate works of art from a Russian museum, in May Finland unilaterally rescinded a contract with Rosatom to build a 1200 MW nuclear power plant at Hanhikivi.
The Finnish government is now bracing for the penalties to pay: an arbitration court has just determined that it terminated the contract with Rosatom without reasonable cause…
It appears that appalling levels of incompetence are occurring throughout the Western world.
What this would suggest is that the Western world is steaming at full speed towards a stage of energy poverty.
Not too long at all. Fascinating and informative!
Thank you! That was very informative and added to the general impression of incompetence at the helm of our government.
Unfortunately, my impression in Germany is that most of the population seems completely on board with committing economic suicide for an unattainable objective. If one disagrees one is smeared as a right wing Putin lover which could not be further from the truth. No rational discussion is possible in the current climate of wokeism.
“most of the population seems completely on board with committing economic suicide for an unattainable objective”.
Is this the first time Germans have embarked upon such unattainable projects?
After reading your description of some of the behind the scenes details of the workings of the oil supply in Germany and Finland, I will regard getting my next tank of gasoline in the u.s. with far less nonchalance. I can only imagine what complexities and machinations lie behind obtaining that gasoline. I believe the u.s. sourcing combines the ineptitude paired with intransigence exemplified in your examples from Germany and Finland along with a large measure of the occult dealings intimated below in the comment from rjs. [I believe you are most kind in thinking only on second thought that such dark dealings might occur in the u.s. — actually probably handled on the sly in Panama or on some Caribbean island which would be South of the u.s. technically.
Well, it looks what we finally found out what Brexit means – economic suicide through sanctions imposed needlessly on yourself …..& the EU having marvelled at the UK’s self-harm is now joining them in a much bigger bang, ‘punishing’ Russia by leaving it the only one in the fight still standing. In a real life ‘matrix’ choice, we took the poison pill, the blue or red ones weren’t hard or stupid enough for us; tragi-comedy.
i reposted my synopsis of the weekly EIA oil data here:
i’ve been covering this report for years…usually it’s like watching paint dry
in this case, i added a comment:
footnote on “unaccounted for oil”
for most of this year, our refinery oil consumption has exceeded our apparent supply of oil from all sources by an average of around a million barrels per day, resulting in a large “unaccounted for oil” entry on the US petroleum balance sheet, as i explain in my second paragraph here…while i allude to that problem with the data cynically, it suggests either that the EIA has suddenly lost the ability to keep track of our oil supplies, or that something else is going on…
The EIA document indicates that “the adjustment […] typically is less than 2% of the disposition”. With the discrepancy slightly exceeding 1M barrels for a refinery capacity of slightly less than 16M, the oil unaccounted for represents more than 6% of the quantities involved. That is no longer within the simple error bounds of statistical accuracy.
In other countries South of the USA, I would have immediately thought about black market and contraband.
there are only a few ways this could happen; they could be over reporting refinery throughput, but in checking gasoline and distillates output, that seems to be in line….they could be underreporting oil imports or overreporting oil exports, but if that were the case by a lot, there’d be a greater discrepancy between the EIA figures and those of the Commerce Dept…they could be underreporting field production, certainly possible as production is around 8% below the prepandemic high…but other output related metrics, such as well completions (fracking) are even further below their prepandemic highs….they could also be underreporting what they pull out of commercial storage, thus overreporting what is left, or similarly be underreporting what they’ve released from the SPR, thus overreporting what is left…but if either of the later is true, our oil inventories would be much lower than the 36 year / 38 year lows i update every week…