Putin seeks to undermine oil worth cap as world power markets collapse

Russia’s announcement of an oil export ban for countries adhering to a G-7 price cap is the latest sign we’ve entered a new era for global energy markets, analysts say.

However, they also note that it is unlikely to have an impact on oil prices in the short term as markets are more guided by data and concrete action than words.

The price cap was introduced on December 5 and requires traders using Western services such as sea lanes, insurance and financing to pay no more than $60 a barrel for Russian oil at sea. According to Finnish refiner Neste, Ural crude is currently trading around $50 a barrel.

Russia on Wednesday said it would ban crude oil and oil products for five months from February 1 for all nations adhering to the cap, with a separate ban on refined oil products to follow.

Dan Yergin, vice chairman of S&P Global, told CNBC’s Squawk Box on Tuesday that despite skepticism about whether the program would work, officials found a way to keep oil flowing into the market while maintaining Russian oil revenues to reduce.

But as a result, he said, we now have a “divided, more politically charged oil market.”

“In the last 30 years, since the collapse of the Soviet Union, we’ve had a global market where oil has moved quite a bit based on economics, exceptions have been Iran and Venezuela.”

“But now we have what I call a divided oil market where Russian oil can no longer get to its largest market which is Europe and the markets have been divided and that oil is now flowing East.”

After Russia’s unprovoked invasion of Ukraine in February, European countries have been scrambling to find alternative sources of oil and gas and new energy security solutions. The EU got 14.4% of its oil from Russia in the third quarter of 2022, down 10.5 percentage points year-on-year, as it increased imports from the US, Norway, Saudi Arabia and Iraq.

On Wednesday, a German government spokesman told Reuters that Moscow’s ban had “no practical significance” for its economy, which is Europe’s largest.

Sophie Lund-Yates, senior equities analyst at Hargreaves Lansdown, said the ban would “fuel concerns about the supply”. As China’s reopening will boost oil demand, oil prices are likely to remain elevated, she told CNBC via email.

However, she added: “To a certain extent, the export ban will already be priced in – Russia willingly presses countries that enforce unhelpful policies is not a new or unexpected tactic. The oil price shock we saw today is not as bad as it could have been and is likely to calm down at least partially in the coming weeks.”

Bill Weatherburn, commodities economist at Capital Economics, agreed that the immediate impact on the market is limited as the move has been under threat from Russia for some time.

He also said this is because the US and Europe have already banned Russian sea crude oil imports; and Urals crude is still trading below $60, allowing India and China to continue importing without clashing with the cap.

boom phase

Rapidan Energy Group’s Bob McNally told CNBC’s Squawk Box Asia that the EU embargo on Russian sea oil, the oil price cap and Russia’s export ban would be the most important factors affecting next year’s supply, and presented a “completely new” scenario.

He expects continued volatility in oil markets in 2023 and beyond. Brent crude futures are currently trading around $84 a barrel, close to where they started the year, but have been on a rollercoaster ride in the meantime, approaching $140 a barrel in intraday trading in March and surging to over $120 in June per barrel.

McNally believes the market is exiting a roughly seven-year stalemate of oversupply and entering a new multi-year boom where demand will be stronger than expected. This will play out amid major geopolitical and macroeconomic uncertainties, and OPEC+ will struggle to balance the market, he said.

As Russia remains the world’s largest oil exporter of crude and refined products combined, the impact of its new embargo could be huge.

But for now, McNally argued, markets have a “boy the wolf cried” mentality after warnings that Russian supplies would halt in March 2022 sent prices skyrocketing but didn’t materialize.

“The market is in a bit of a complacent mood on Russia and saying we’ll believe it when we see it,” McNally said.

Russian sea crude exports are down about 24% mom in December – “so it’s starting to happen, but the market will wait to see it before pricing it and acting on it,” he added.

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