The price of Brent oil was recently dragged down by the pessimistic view of the world economy. US oil inventories continue to decline, while Chinese inventories are at seasonal lows. Meanwhile, the EU financial services ban on Russian maritime oil shipments on December 5 is fast approaching. There is a risk that up to 3.2 million barrels of Russian oil will be destroyed. in barrels. So far, very few Russian oil cargoes have been booked for December and non-Russian oil premiums are starting to rise.
Brent crude rose in the first half of last week following a large increase in risk sentiment, but prices fell at the end of the week. Brent closed at $ 95.77 on Friday. It fell 1.3% to $ 94.50 this morning, in line with declines in Chinese stocks and industrial metals.
Brent crude trading these days could reflect a general decline in risk appetite, which will eventually push prices higher again. The oil market is fundamentally tight. US inventories continue to decline, confirming the premises of a global deficit. Before us are EU sanctions on Russian oil and oil products delivered by sea, which will come into effect on 5 December and 5 February respectively. Furthermore, the arrival of US Strategic Petroleum Reserves (SPRs) on the market, which has created a somewhat false impression on the real situation in the market, is expected to end soon.
As of December 5, EU financial institutions will no longer be able to insure or provide financial services related to Russian oil shipments by sea. EU insurance companies dominate global shipping. Estimates show that they account for 90% of the world’s ship insurance. Although there are many insurance companies registered outside the EU, they mainly use reinsurance companies in the EU. This also applies to Chinese and Indian insurance companies. The 5 December EU ban is an extremely powerful tool. There is a risk that the ban will cause a sharp drop in Russian exports of offshore crude oil.
Russia usually exports 5 million. barrels of oil and 3 million barrels of petroleum products, of which almost 50% ends up in the European member states of the OECD. Argon estimates that 5.5 million barrels of the total of 8 million are exported by sea, while the rest goes through oil pipelines. Therefore, EU sanctions on financial services threaten 5.5 million export barrels of Russian oil and its products. Of these, approximately 3.2 million barrels are oil and 2.4 million oil products. Thus, as of December 5, some 3.2 million barrels of Russian oil are at risk from EU sanctions.
The G7 proposal on the “price ceiling” is intended to allow Russian oil access to the market. An EU ban on financial services would effectively prevent Russian oil from entering the market, causing a huge rise in oil prices. To address this risk, the G7 has proposed a “maximum price” whereby consumers can buy Russian oil and receive EU financial services for the purchase if they pay a maximum oil price, for example, $ 60 USD. The idea is to keep the flow of Russian oil exports, but deny Russia an increase in oil export earnings. Russia has stated that it will not sell oil to anyone at a limited price. Furthermore, the details of the G7 price ceiling mechanism have not yet been disclosed. Due to the lack of information, the market is refraining from ordering Russian oil for December.
So far, Chinese refineries have booked only 1 of 30 Russian Espo blend shipments for December delivery. This is much less than usual. However, Chinese refineries still have time to reserve Russian oil for December, as the travel time from Russian Kozmino to China is only 5 days. However, there are signs that the benchmark prices of oil produced outside of Russia are higher than those of Russian brands as buyers start looking for alternatives.
It is clear that Russia will try to sell oil despite the EU ban. There is already a “shadow fleet” operating around the world, carrying 1.25 million oil from Venezuela and Iran. According to the naval intermediary BRS, this shadow fleet consists of nearly 270 ships. This fleet will have to expand significantly to serve another 3.2 million. barrels of Russian oil. This will create giant movements and ripples both in and out of the market. There are differing views on the impact of sanctions and the price cap mechanism on Russian oil exports.
“Theoretically, there is a shadow fleet large enough to continue Russian crude flows beyond December 5,” Andrea Olivi, head of the global liquid commodity group at commodity trading giant Trafigura, told Reuters. “Many of these shadow ships will be able to self-insure or be insured by the Russian P & I,” he added. JP Morgan believes the impact of the price cap is uncertain as Russia can almost entirely avoid the ban by using Chinese, Indian and own ships. Therefore, Russian exports in December may even decrease by a relatively small amount.
SEB Bank expects the price of Brent oil to reach $ 125. Respectively, the average price of Brent oil in the first quarter of next year will be USD 115, and in the 2nd quarter it will be USD 125.
