Russian Crude Price Surpasses G7 Cap Amid Supply Crunch Anticipation.
Russia’s crude oil spot prices have exceeded the $60-per-barrel threshold set by the Group of Seven’s (G7) oil price cap scheme, indicating a tightening of supplies from Moscow and Riyadh. The G7 implemented this mechanism to maintain Russian oil flows in the market while restricting revenue for the Kremlin’s military operations.
Following introduction of the price cap scheme in December, the European Union banned imports of Russian crude. According to the G7 scheme, non-G7 buyers of Russian crude can receive services from Western shipping and insurance providers only if the oil is acquired at a price below $60 per barrel.
This week, the spot prices for Russia’s main export crude, known as Urals, which is a heavy-sulfur and “sour” oil loaded from ports like Primorsk, Ust-Luga, and Novorossiysk, surpassed the $60-per-barrel threshold for the first time since the implementation of the price cap mechanism.
Assessments from commodities pricing agencies, such as Argus and S&P Global Platts, indicated prices ranging from $60.18 to $60.78 per barrel for different Urals cargoes.
Crude oil traders, speaking anonymously, attributed the increase in spot Urals prices to global oil price hikes, with Ice Brent futures reaching over $80 per barrel on July 12. Disruptions in Libya have also contributed to sustaining this price level.
The Organization of the Petroleum Exporting Countries and the International Energy Agency forecast a surge in oil demand in the year’s second half. To manage supply, some OPEC+ members are implementing voluntary production cuts of 1.66 million barrels per day until the end of 2024.
Additionally, Saudi Arabia announced an extra unilateral decline of 1 million barrels per day for July and August, while Russia committed to cutting exports by an additional 500,000 barrels per day in the coming month.
Experts anticipate that with reduced supply from OPEC+ during the high-demand summer months, oil prices will be supported by more significant inventory declines.
Other factors contributing to the rise in Urals prices include the ongoing deadlock between Turkey and Iraq, which has resulted in the blockage of around 450,000 barrels per day of sour Kurdish crude flow via Ceyhan.
The concerns over macroeconomic factors impacting the crude oil market, such as U.S. inflation, have eased due to lower inflation rates. This has led to speculation that the U.S. Federal Reserve may scale back its program of interest rate hikes.
As a result, the U.S. dollar has weakened, equities have rallied, and there has been robust crude oil import data from China in June, according to Argus Chief Economist David Fyfe.
According to a trader interviewed, the demand for sour crude has surged, and dwindling refinery stocks no longer cushion the impact of lower output. As a result, prices for alternative crude options like Norway’s Johan Sverdrup and Libya’s Es Sider have spiked.
The Argus Global Head of Editorial Neil Fleming, explained that since most Russian crude falls on the heavier end of the spectrum, similar to Middle Eastern oil, it has become more valuable to buyers in Asia, especially India and China.
Many Asian oil refineries were designed to process higher-density “heavy” Middle Eastern oil, which is now in shorter supply due to OPEC’s production cuts.
While the breach of $60 per barrel for Russian crude prices might not immediately lead to changes in the price cap scheme, two traders suggested that G7 regulators would likely monitor the situation for a potential trend.
One trader mentioned the possibility of Washington considering another release of crude from strategic petroleum reserves (SPR) to mitigate price increases. However, the current low U.S. inflation might deprioritize such action.
The G7 periodically reviews the price cap, typically every two months, and relies on assessments from the International Energy Agency (IEA) regarding Russian export levels and revenues. So far, the G7 has hesitated to upset the balance of keeping Russian crude available while limiting its payments.
The increase above $60 per barrel is expected to mainly impact shipping and insurance arrangements for the “grey” fleet, which refers to oil tankers, including those purchased by Russia, that transport Russian crude under the G7 scheme.
Another option traders mention is the “dark” fleet, which involves vessels transporting Russian crude without investigating its purchase price and sometimes turning off position signalling devices during delivery.
The International Energy Agency’s latest report estimates that Russian crude and refined oil exports are already under pressure, losing 600,000 barrels daily in June. According to the IEA, Moscow’s export revenues for oil have also significantly declined, dropping by $1.5 billion to $11.8 billion compared to the same period last year.
However, some Russian crude transport, particularly to crucial buyer India, is expected to continue smoothly as it is mainly insured by non-Western providers and carried on Russia’s fleet, as noted by Viktor Katona, the Lead Crude Analyst at Kpler.
Any potential changes due to buyer concerns about transactional risks may lead to a shift in the currency for payments, such as using UAE dirhams instead of dollars. However, the yuan is seen as a politically less favourable option for Indian refiners.
