In fulfillment of his promise to take the sanctions back to the promulgators or and supporters anytime soon, the Russian leader, President Vladmir Putin has banned the supply of Russian oil to countries observing the price cap.

World Street Journal [WSJ] said last night that Putin has ordered deliveries to those nations only on the basis of a special permission from the Kremlin leader. According to the decree, the retaliatory measures are scheduled to come into effect Feb. 1 and last through July 1, 2023.

The report said Russia’s new decisions are in response to what the decree described as unfriendly actions of the U.S., foreign states and international organizations that contradict international law.
Putin said the new promulgations are designed “to protect the national interests of the Russian Federation.”

Also Read: Russia Projects 7.5% Oil Exports Growth By 2022

The European Union and the U.K. earlier this month banned the import of seaborne Russian crude, while the Group of Seven nations put a ceiling on other sales by barring Western companies from insuring, financing or shipping Russian crude at above $60 a barrel.

The implications of Russia’s new decree is that the country will not sell below $60, and has additionally banned the sale outright to all countries that engaged in price cap and other sanctions.

While the price cap has not seen a major impact on pricing so far, that will likely change soon: Urals oil is trading with a generous discount to spot Brent, and was last seen around $50.

Also Read: Russia Looks To Cut Its Dependence On The US Dollar

In other words, those nations buying Urals – mostly China and India – are not violating the G-7 pact… yet. However, once Urals follows Brent higher, and its price rises above $60/barrel that will change, and at that point it will be interesting to see how the G7 responds to the two fastest growing economies and two most populous nations openly defying the G7’s Russian oil price floor.

The news, which was largely as expected, has not had an impact on the price of oil with WTI and Brent both trading at three week highs following news that China was ending zero-covid policies and reopening its economy.

Russia’s deputy prime minister, Alexander Novak has said that his country’s oil exports will grow by 7.5% to 242 million metric tons in 2022, while oil output is expected to increase by 2%.

Novak, who spoke to TASS in an interview, stated that Russian oil exports have grown steadily despite the pressure from western sanctions as companies have reconsidered logistics schemes and made agreements on payments.

He confirmed that Russian exports are currently being redirected to the Asia-Pacific region, Africa and Latin America.

Despite the bullish projections by Russia’s deputy PM, Reuters in a report yesterday, stated that exports of Russia’s flagship Urals crude blend from the Baltic Sea ports will probably fall to around 5 million tonnes this month from 6 million tonnes in November, thanks to an EU embargo on Russian oil and a Western price cap.

Also Read: Putin Opens Siberian Natural Gas Field To Increase Exports To China

Some estimates have predicted it could fall as low as 4.7 million tonnes.
The $60 per barrel price cap introduced by the European Union, G7 nations, and Australia allows non-EU countries to import seaborne Russian crude oil, but prohibits shipping, insurance, and reinsurance companies from handling cargoes of Russian crude unless it is sold for under $60.

Traders have reported to Reuters that Russia is struggling to fully redirect Urals exports from Europe to other markets such as China and India and is also having a hard time finding enough suitable vessels.
Russia’s problems have been compounded by a shortage of non-western tonnage, moderate demand for the grade in Asia, especially in China, and a weak export economy.

The agency reported further that Russia’s pipeline monopoly Transneft has been unable to fill some of the available loading slots due to a lack of bids from producers, while other slots were postponed or canceled.

Also Read: Sanctions: Russia’s Oil Exports from Baltic Seaports Could Fall by 20%

Only China, India, Bulgaria, and Turkey are currently willing to buy the Urals with the blend now being sold to export markets at below overall production cost, including local levies.

By Bosco Agba

Moscow is beginning to feel the heat of its war in Ukraine, and could be losing as much as $4 billion a month in energy revenues.

Russian President, Vladimir Putin has inaugurated the Kovykta natural gas field in eastern Siberia, located strategically to allow Russia to increase gas exports to China.

The inauguration of the gas field last Wednesday is one of the strategic measures introduced by Russia amid growing tensions between Moscow and the West, and the biting sanctions from the G7 and the EU.
Last Monday it was reported that Russia and Iran, which have grown increasingly closer in recent years, have joined forces to evade the Western sanctions on their exports by constructing a $20billion, new waterway-railway route from Russia-occupied territories in Ukraine to the southernmost ports in the Islamic Republic.

Bloomberg reported that Russia and Iran, united by their increasingly closer military ties and the fact that they are both pariahs in international trade due to the Western sanctions, are now looking to expand their trade ties with Asia and are expanding canals on navigable rivers and building railroads to support growing trade.

Also Read: As Sanctions Kick In, Putin Vows To Deepen Trade Ties With China, Others

The inauguration of the Kovykta natural gas field in eastern Siberia by Putin is the culmination of efforts that began about a decade ago to develop new fields and build the Power of Siberia pipeline to deliver to the rapidly expanding market.

“We are launching the unique Kovykta gas field, the largest in eastern Siberia. Its recoverable reserves are 1.8 trillion cubic meters of gas,” Putin said via video link during a televised ceremony.

Currently, Russia lacks pipelines to transport gas from its Western Siberian and Arctic gas fields that serve China and Europe. The first Power of Siberia pipeline began to deliver gas from eastern Siberia to China at the end of 2019. It won’t be the last.

Russia has laid out plans to build a Power of Siberia 2 pipeline as it increasingly turns to the Middle Kingdom in the face of heavy western sanctions.

China and India have become some of the biggest buyers of Russian oil and gas, with Bloomberg’s oil strategist Julian Lee revealing that Russia’s flagship Urals crude oil has been trading at a massive discount of more than per barrel $30, or about 40% to the international Brent crude oil, at the end of last week.

Also Read: Putin Considers Slashing Russia’s Oil Production

This time last year, Urals traded at a much smaller discount of $2.85 to Brent. Urals is the main blend exported by Russia. The result: Moscow is beginning to feel the heat of its war in Ukraine, and could be losing as much as $4 billion a month in energy revenues, as per Bloomberg’s calculations.

Supplies of Russian pipeline gas – the bulk of Europe’s gas imports before the Ukraine war – are down to a trickle and might be further impacted after a gas pipeline in central Russia that brings gas from Russia’s Arctic through Ukraine to Europe was shut down on Tuesday following a deadly blast.

It is expected that exports of Russia’s flagship Urals crude blend from the Baltic Sea ports will probably fall to around 5 million tonnes this month from 6 million tonnes in November, following the EU embargo on Russian oil and a Western price cap.

Reuters said in a report last night that some estimates have predicted it could fall as low as 4.7 million tonnes. The $60 per barrel price cap introduced by the European Union, G7 nations and Australia allows non-EU countries to import seaborne Russian crude oil, but prohibits shipping, insurance and reinsurance companies from handling cargoes of Russian crude unless it is sold for under $60.

The report said Russia is currently struggling to fully redirect Urals exports from Europe to other markets such as China and India. It is reported that embattled Russia is also having a hard time finding enough suitable vessels.

Also Read: Russia, Iran Develop New $20bn Trade Route To Beat Sanctions

Russia’s problems have been compounded by a shortage of non-western tonnage, moderate demand for the grade in Asia, especially in China and a weak export economy.

News reports say that Russia’s pipeline monopoly Transneft has been unable to fill some of the available loading slots due to a lack of bids from producers while other slots were postponed or canceled.

Only China, India, Bulgaria and Turkey are said to be showing interest in buying Russia’s Urals, with the blend now being sold to export markets at below overall production cost including local levies.

It’s going to be interesting to see the long-term effects of the price-cap on Europe’s and Russia’s energy sector.

Citi’s global head of commodities research, Ed Morse, has dismissed the price cap, terming it as silly, impractical and unlikely to work in tight gas markets because gas markets are global and not bifurcated into  individual countries, meaning the forces of demand and supply are more likely to prevail in determining gas prices.

Also Read: Russian Oil Exports Crash By 54% A Week After EU Sanctions

As such, Morse says the price cap is likely to lead to gas shortages in Europe especially during winter months when demand is high. Further, the commodity analyst says that getting rid of the TTF natural gas benchmark is likely to cause chaos when determining gas prices especially if other existing benchmarks lack sufficient liquidity.

…Says it may backfire

Head of the European Union Agency for the Cooperation of Energy Regulators (ACER), Christian Zinglersen, has argued that, after all, the EU’s price cap on natural gas, being an untested tool, may not achieve desired objective

The ACER director told the Financial Times that the gas price cap may not work as intended to prevent gas price spikes for European households and businesses.

The strategy is “a difficult creature. It’s unprecedented, it’s untested,” the ACER boss FT after the EU energy ministers agreed to set a cap on the benchmark EU gas price as of the middle of February 2023.   
Zinglersen made it clear that he would be “reluctant to rely on this gas price cap” to protect EU consumers from price spikes.

Also Read: EU Ministers Settle For €180 MWh Gas Price Cap

After months of negotiations, the EU finally agreed last Monday to set a price cap on natural gas to protect consumers from excessive price spikes and limit inflationary pressure and industrial damage to European economies.

Last Monday, EU energy ministers reached a political agreement on a regulation that sets a so-called “market correction mechanism”, which would come into force on February 15, 2023.

The market correction mechanism will be triggered if the month-ahead price on the Title Transfer Facility (TTF), Europe’s key benchmark, exceeds $191 (180 euros) per MWh for three working days, and the month-ahead TTF price is $37 (35 euros) higher than a reference price for LNG on global markets for the same three working days.

The EU however agreed that if risks to the security of supply occur, the European Commission will suspend the price cap rule. The price cap could limit Europe’s capacity to continue to draw most of the global spot LNG supply, analysts say.

Also Read: EU Attempts To Break The Deadlock Over A Natural Gas Price Cap

Some EU member states such as Germany and the Netherlands had reservations about a price cap, concerned that a market intervention and a ceiling on prices would take away Europe’s key advantage in attracting LNG supply—higher prices than in Asia. Germany agreed to back the price cap only after the EU also agreed to accelerate permitting rules for renewable energy projects, according to EU officials.   

As effects of the Western sanctions on Russian oil kick in and Western buyers shun or banned imports of many Russian energy products, reports said yesterday that China’s imports of oil, pipeline gas, LNG, and coal from Russia have hit a total of $68 billion since the Russian invasion of Ukraine.

During the same period last year, the figure stood at $41 billion. A report compiled by Bloomberg said Western buyers are either shunning, or have banned imports of many Russian energy products.

The report said China’s imports of LNG from Russia surged to a record in November although overall Chinese LNG purchases were down by 5.4% year over year, per Chinese customs data cited by the agency.   

Also Read: China Announces Closer Energy Sector Partnerships With Russia

Chinese imports of LNG from Russia doubled to 852,000 tons in November compared to the same month in 2021. Oil imports from Russia also jumped last month, by 17%, and Russia beat Saudi Arabia to be China’s top oil supplier in November, according to the data.

Chinese imports of Russian coal surged by 41%, doubling from November 2021, although they were off the record high from September this year.

Early this week, there were reports that many independent Chinese refiners based in the Shandong province have continued to buy Russian crude and are ignoring the price cap imposed by Western countries.

The price cap on Russian crude imposed by the EU, the G7, and Australia came into effect on December 5, but China hasn’t joined the so-called Price Cap Coalition, which bans maritime transportation services for Russian crude oil unless the oil is sold at or below $60 per barrel. 

Also Read: A Russian Oil Price Cap Will Benefit China, India – US

On the other hand, independent Chinese refiners have seen their refining margins jump in recent weeks as they are able to negotiate steeper discounts for their preferred Russian crude grade, even if they buy it above the price cap, trading and industry sources told Reuters on Tuesday.

The flow of cheaper Russian crude to China lifted the refining margins of the independent refiners, the so-called teapots, to above $115 (800 Chinese yuan) per ton last week, from less than $86 (600 yuan) at the beginning of December, according to a China-based oil analyst who spoke to Reuters. 

By Bosco Agba   

It is the first full week of G7 and EU economic sanctions against Russia, and data compiled by Bloomberg shows that Russian oil exports has tumbled by more than half.

The report said that in the week that ended December 16, which marked the first full week after the ban set in, total volumes of oil exports coming out of Russia fell by 1.86 million barrels a day, or 54%, to about 1.6 million.

Also, the four-week average also dropped to a new low for 2022, Bloomberg said in the report published last night.

The global news agency also said that there were shortages of ships whose owners were willing to transport Russian oil from an export facility in Asia.

Also Read: EU Sanctions Against Russian Oil: Skeptics Still Not Sure It Will Work

However, observers say the data must be viewed cautiously, as variables like weather and cargo scheduling can sway week-over-week changes in flows.

Still, other evidence has emerged that the market for ships is tightening. US oil company Exxon Mobil is avoiding hiring oil tankers that used to carry Russian supplies, according to Bloomberg.
Global energy rival Shell has also made a similar move as the possibility of some Russian oil being left over in a tanker risks violating sanctions.

There were however, cases of “dark fleet” of tankers that have been assembled to move Russian oil below the radar, the oil majors are making it harder for those ships to eventually go back to moving non-Russian supplies, the report said.

It would be recalled that on December 5, the European Union banned imports of Russian oil by sea and blocked shipping and related financial services for companies transporting Russian oil.

Also Read: India Insists On Purchasing Russian Oil Despite EU Sanctions

At the same time, the EU and the G7 imposed a $60-per-barrel price cap on Moscow’s crude. The overall idea, they said was to stifle Moscow’s export revenue while still keeping Russian crude flowing on the market and preventing a supply shock that would spike prices.

For buyers abiding by the cap, some of the measures in the EU embargo are allowed, such as insurance. For those that pay above $60 a barrel, then they cannot access EU services for 90 days.

Europe’s biggest economy, Germany, has seen the share of Russian gas in its gas mix drop to some 20% this year from 55% last year, per data from energy lobby group BDEW cited by Bloomberg on Tuesday.

Russia started gradually cutting gas supply via the Nord Stream pipeline to Germany in June until shutting down the pipeline in early September, claiming an inability to repair gas turbines for the pumping stations due to Western sanctions.   

Germany, for its part, started looking at importing LNG and began construction of regasification terminals to be able to welcome cargoes. The first such terminal, a floating LNG import terminal, officially opened last week at Wilhelmshaven on Germany’s North Sea coast.

Other LNG terminals are also planned in Germany, which was rather reluctant to commit to LNG import facilities before the Russian invasion of Ukraine.

Also Read: Germany Knew About Current Russian Gas Blackmail Months Before Ukraine Invasion

After the war started, Germany, the Netherlands, Finland, and countries in southern Europe hastened to bring forward or dust off plans to build floating LNG terminals to have enough regasification capacity to replace the lost volumes of Russian pipeline gas. 

Germany also signed a deal with Qatar and ConocoPhillips last month, under which Qatar will provide liquefied natural gas to Germany for at least 15 years beginning in 2026. Per two sale and purchase agreements between ConocoPhillips and QatarEnergy, up to 2 million tons per annum (MTPA) of LNG from Qatar will be delivered to Germany by a wholly-owned subsidiary of ConocoPhillips, which will purchase the quantities and deliver them to the Brunsbüttel LNG import terminal in northern Germany.

Despite the fast construction of LNG import facilities, Germany needs to save gas if it wants to go through this winter without extraordinary measures such as rationing, the network regulator Bundesnetzagentur and other authorities have warned for months. Germany may have to take drastic measures such as gas rationing if levels of gas in storage drop below 40% by February 1 next year, according to the regulator, which will enact such measures if necessary.

Also Read: Germany And Europe Set For Energy Rationing After Russian Gas Cuts

German households and businesses have been urged to turn down their heating in order to conserve more gas as winter is coming while gas flows from Russia are cut.

OilPrice.com