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.”