Russian oil to ‘starve’ Putin’s war effort

With price controls, barrels of Russian oil could conceivably still make their way onto the global market, preventing a severe supply constraint — but Moscow would no longer be able to reap huge profits.

President Biden and his G-7 counterparts intend to propose new economic measures Monday to pressure Russian President Vladimir Putin to cease his war in Ukraine, including an endeavor to create a global price restriction for Russian oil shipments. The planned statement comes on the same day that Ukrainian President Volodymyr Zelensky will deliver a virtual address to the G-7, boosting pressure on the G-7 to maintain its united front in holding Russia accountable.

A senior administration official told reporters on a conference call that the leaders were finalizing details and were “very close” to urgently directing their respective cabinet ministers to create a system to set a global price cap for Russian oil shipments to countries other than the European Union, the United Kingdom, the United States, and other G-7 nations. Russia defaulted on its foreign currency debt for the first time in more than a century on Monday due to Western sanctions imposed in the early days of the war. Russia last defaulted on its international debt after the Bolshevik Revolution in 1918.

Furthermore, the leaders want to announce measures aimed at Russian military manufacturing and supply chains, new taxes on some Russian commodities, and extra penalties against individuals guilty of human rights violations such as war crimes and profiteering.

The price cap on Russian oil could shake up the market

Europe and the United States have banned the purchase of Russian oil, cutting off a vital source of money for the Kremlin. But the strategy of heaping suffering on President Vladimir Putin to force him to reconsider his conflict in Ukraine has failed.

Russia’s government is making the same amount of money from oil exports as it did before the invasion. Meanwhile, global inflation is soaring, putting political pressure on leaders including US President Joe Biden, British Prime Minister Boris Johnson, and French President Emmanuel Macron.

As a result, leaders from the world’s major economies assembled in Germany for the G7 meeting are considering a novel approach: imposing price controls on Russian petroleum.

Customers in Europe have reduced their purchases from Russia even before the bloc’s partial embargo takes effect. However, increased exports to Asia have helped offset a major portion of those losses. China imported 2 million barrels of Russian oil per day for the first time last month, taking advantage of substantial price cuts. India’s imports also increased, hovering at 900,000 barrels per day in May.

According to the International Energy Agency, Russian oil export income grew by $1.7 billion in May to around $20 billion. It is significantly more than the 2021 average of about $15 billion.

If China and India had to find substitutes for Russian crude, the price of oil might easily exceed $200 per barrel, according to Darwei Kung, portfolio manager for commodities at DWS. It is currently going for more than $112 per barrel.

One way would be to prohibit G7-based companies from providing insurance for oil cargoes if purchasers paid more than a specified amount.

Nonetheless, Kung warned that increasing the complexity of energy markets could increase friction and make transactions more complicated, leading to higher costs than would otherwise be the case.

EIA’s June 2022 Oil Production Outlooks

The EIA publishes four monthly reports that forecast oil output for the United States and the rest of the world. The Short Term Energy Outlook (STEO) anticipates oil output for the United States and the rest of the world over the next 12 to 24 months. The Drilling Productivity Report (DPR) expects combined conventional and tight oil production in the main closed oil basins four months ahead of the EIA monthly report. Light Tight Oil (LTO), their third report, focuses solely on tight oil produced in seven closed oil basins and a few minor ones.

The 321 barrel price is $169.86/b based on the June 24 settled prices for gasoline at $3.8848/gal, heating oil at 4.3629/gal, and WTI at 107.62/b. Using this information, the crack spread margin is $62.24/b. It noted that heating oil was utilized as a stand-in for ULSD. The crack spread margin would be lower if ULSD were more expensive than heating oil.