Top of the morning, readers. I’m senior reporter Phil Rosen.
While there remains plenty of hubbub around the crypto world and FTX, today I’d like to point your attention to Russian oil.
Remember, before Vladimir Putin ordered the invasion of Ukraine, Russia was Europe’s leading fuel supplier, and the world’s second largest exporter of crude.
But since then, many countries, including the US, imposed sanctions on the warring nation, with the aim of punishing Russia’s economy. In December, a $60-per-barrel price cap was established to limit how much cash Moscow could pull in from oil exports.
But the country’s key oil product is trading far below that level, which in one sense makes the cap moot. I caught up with oil historian Gregory Brew, to get the details.
1. Currently, Russia’s Urals blend is trading at $37.80 a barrel, according to data from Argus Media. That’s less than half the mark of Brent crude, the international benchmark.
At first glance, the depressed prices signal that Russia is struggling to recoup European and other customers that have shunned them in trade.
But to Gregory Brew, a Kissinger Visiting Scholar at Yale, rather than being a direct consequence of any sanction measure, the steep discount reflects the easing global market.
“Since the war, we’ve generally seen Urals go for less, so this isn’t a surprise,” he told me on a phone call. “The current drop reflects softer conditions on the market overall. There’s uncertainty with the global economy and with China’s zero-COVID policies.”
That low price, Brew maintained, suggests Russia will have to keep offering fairly steep discounts in order to maintain its market share, which has come under pressure.
He noted that Urals as a product, too, isn’t a good benchmark for all of Russia’s oil, as it has a narrower refining market and tends to get priced lower because of certain distinct characteristics compared to other global crude benchmarks.
But ultimately this is a demand-driven story, in Brew’s view, and China is the key variable here. Whether domestic demand there bounces back sufficiently will determine a great deal of how global flows move.
It isn’t about what Russia can produce or how badly it’s revenue is impacted by sanctions, but instead the focus should be on what kind of market Russia will be operating in.
Whether Chinese demand comes roaring back or not will hold the biggest sway, the historian said, on how steep a discount Russia can sell its oil at.
“Softer market conditions have made the [price] cap somewhat moot,” Brew said. “The market is somewhat oversupplied, and to say this is the result of the cap is a bit hard to argue.”
What will the standing of Russia as a world energy hub be by the end of the year?
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