June 20, 2024

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The price of Russian crude exceeds the ceiling of the Group of Seven prices, as the market approaches a supply crisis

The price of Russian crude exceeds the ceiling of the Group of Seven prices, as the market approaches a supply crisis
  • Spot values ​​of the main Russian crude oil this week crossed the $60 per barrel threshold of the G7 oil price cap chart.
  • The G-7 introduced the oil price cap mechanism on Dec. 5 to keep Russian flows into the market while limiting the Kremlin’s war coffers.
  • Many crude oil traders attributed the rise in Russian crude prices to fundamental increases in global oil prices, as Moscow and Riyadh cut back supplies.

View of the Russian oil port of Novorossiysk.

Алексей Облов | moment | Getty Images

Spot prices for Russian crude oil this week crossed the $60 per barrel threshold in the G7 oil price cap scheme, as Moscow and Riyadh restrict supplies.

The G-7 introduced the oil price cap mechanism on December 5th to keep Russian flows into the market while limiting the Kremlin’s war coffers.

EU imports of Moscow’s crude oil were banned that same month. Under the G7 scheme, Western shipping and insurance providers can provide services to non-G7 buyers of Russian crude if the crude is obtained at less than $60 a barrel.

Prices of Russia’s main export crude – heavy sulfur and Urals “sour”, which are loaded from the ports of Primorsk, Ust-Luga and Novorossiysk – have exceeded this week for the first time since the introduction of the price-capping mechanism.

Real-time assessments from commodity pricing agency Argus show that Urals prices on July 12 reached $60.18 and $60.78 per barrel for Primorsk and Novorossiysk cargoes, respectively. Meanwhile, S&P Global Platts estimated Primorsk cargoes at $60.32 per barrel on July 11 and Novorossiysk Urals crude at $60.26 per barrel on July 12.

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Several crude oil traders — who spoke to CNBC anonymously due to contractual constraints — attributed the immediate surge in Urals prices to fundamental increases in global oil prices, with icy Brent crude futures stabilizing as September ended above $80 a barrel on Monday. July 12th. Libya has maintained this level.

The Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency expected demand to increase in the second half of the year.

On the supply side, some members of the OPEC+ group – which includes OPEC and its allies – are implementing 1.66 million barrels per day of voluntary production cuts through the end of 2024. July and August, while Russia has committed to cutting exports by an additional 500,000 barrels per day next month.

“With lower supply from OPEC+ during the demand-intensive summer months, we expect larger drawdowns in oil inventories to emerge and support oil prices,” UBS strategist Giovanni Stonovo said in a note on Thursday.

Urals values ​​also rose amid “the ongoing stalemate between Turkey and Iraq, which is blocking about 450,000 bpd of high-sulfur Kurdish crude flowing through Ceyhan supporting sour crude values,” S&P Global Commodity Insights told CNBC via email.

Lower inflation in the US eased some of the macroeconomic concerns that had weighed on the Crude Oil complex throughout the year.

“The US Federal Reserve may now be able to scale back its program of rate hikes, even if they are likely to continue to raise interest rates in July. This is already starting to weigh on the US dollar while simultaneously allowing In Argos, via email, we have some pretty massive Chinese commodity import data today for the month of June, not the least of which is strong crude oil imports.”

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Demand for high-sulfur crude has picked up by itself, one trader told CNBC, as dwindling refinery inventories no longer mitigate the impact of lower production. Other dealers said that the prices of available Urals crude alternatives such as Norway’s Johan Sverdrup and Libyan Sidr rose as a result.

“Most of Russia’s crude is on the heavier end of the spectrum, similar to a lot of Middle Eastern oil. Since a lot of Asian oil refineries have been built to use high-density ‘heavy’ Middle Eastern materials, and that’s now in short supply because of OPEC, crude is Russian is more valuable to buyers in India, China and the rest of Asia.

A one-time break above $60 a barrel for Russian crude prices may not lead to changes in the chart’s price cap, two traders said, as G7 regulators are likely to wait to see if the trend consolidates. One suggested that it might push Washington to consider issuing another crude oil from the Strategic Petroleum Reserve (SPR) to mitigate the price hike, although currently low US inflation may deprioritize this.

“The G7 theoretically revises the price ceiling every two months, with the International Energy Agency being required to provide an assessment of Russian export levels and revenues,” Fyfe said, adding that the bloc had so far been loath to “disrupt the dynamic” of leaving Russian crude. Available with narrowing of Russian revenue.

Two of the traders said that a rise above $60 a barrel would greatly affect the shipping and insurance arrangements of the so-called “gray” fleet — oil tankers, including vessels bought by Russia, that transport Russian-purchased crude within the boundaries of the G7 scheme. Another alternative to delivery, they said, is the “dark” fleet – ships that take in Russian crude without checking the price for it and sometimes turn off their location beacons during delivery.

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The International Energy Agency estimated in its latest report Thursday that Russian crude and refined oil exports are already under pressure, losing 600,000 barrels per day in June. The International Energy Agency found that Moscow’s export revenues fell by $1.5 billion to $11.8 billion last month, down half from the same period last year.

It is not likely to impede some Russian crude transfers. Supply destined for major buyer India is largely insured by non-Western providers and transported overwhelmingly on Russia’s own fleet, says Victor Katona, Kpler crude oil analyst.

“In the event that some Indian buyers are worried about transactional risks, the most likely change this will bring is a currency change. Until now, most payments were still in dollars, and convertible into for example UAE dirhams (yuan) would be the least politically acceptable option for companies.” Indian refining even if it will also provide some kind of stability.”