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Russia’s oil revenue is finally being affected by the EU’s near-total ban on Russian crude imports. For the time being, concerns that it would give the Kremlin a windfall to fund its war in Ukraine have been dispelled.
The European Union imposed sanctions on Russia’s seaborne crude on Monday, which the US administration feared would cause prices to soar. The restriction on providing ships and services like insurance and financing to Russian cargoes moving a certain distance was the primary source of concern.
However, it appears that they did not need to be concerned, at least not yet.
The last barrels from Russia have been transported to European ports. Moscow has lost a market for more than 1.5 million barrels per day on its doorstep. If Poland and Germany keep their promises to stop pipeline imports, it looks like it will lose another 500,000 barrels per day by the end of the year.
Oil prices have plummeted, not soared. On the fifth day of the import ban, Brent crude, the benchmark, was trading below $77 a barrel and briefly fell below $76. That is a decrease of more than 14% compared to the highs that were reached on Monday, when the sanctions went into effect.
Russia has seen further price declines for its crude shipments. At the country’s Baltic ports, which continue to be the primary destination for its crude, its key Urals export grade was being traded for little more than $40 per barrel. That is close to the level that is considered to be the breakeven cost of production and is significantly less than the price cap of $60 per barrel that was imposed in conjunction with the EU import ban.
The inability of Russia to reroute oil flows is demonstrated by the continued significance of its Baltic ports even after the country lost its European market. The only pipeline that leads to China and Russia’s Pacific coast export terminal at Kozmino is already full, and the only way supplies can get to Russia’s last markets in China, India, and Turkey are long journeys through Europe and the Suez Canal.
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The EU sanctions have caused localized gluts in those markets, not a shortage of crude.
Sellers are required to offer substantial discounts in order to offset the high cost of the lengthy journeys required to deliver cargoes from the Baltic because a large quantity of Russian oil is competing with flows from traditional suppliers in the Middle East.
Europe is not looking for crude at this time. As I suggested at the beginning of November, the world can easily handle the loss of Russian barrels, at least for the time being, as Russia’s invasion of Ukraine has fueled inflation, including for food and energy.
In the upcoming months, that might change. China is easing its restrictions on COVID, which has the potential to eventually rekindle fuel demand that has been hampered by travel restrictions and a slowdown in economic activity. That will once more tighten the market.
Additionally, the EU may soon impose a more severe ban on the import of Russian diesel and other refined oil products. That could shake up the oil markets, which already lack the fuel for transportation.
As a result of the price cap on his crude, Russian President Vladimir Putin is threatening to reduce oil production. If the oil industry is unable to sell its oil profitably, he might find that it makes the decision for him.
Crude export duty will already have a significant impact on the Kremlin’s revenue next month. Russia’s per-barrel duty may fall to its lowest level in January based on crude prices since the middle of the month. This is the lowest level since the Covid-19 pandemic cut into revenue at the beginning of 2020.
(“This story remains unedited by News360Express staff and is published from a syndicated feed.”)