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Exports of Russia's flagship Urals crude blend from the Baltic Sea ports will probably fall to around 5 million tonnes this month from 6 million tonnes in November, thanks to an EU embargo on Russian oil and a Western price cap, according to Reuters calculations. Some estimates have predicted it could fall as low as 4.7 million tonnes.
The $60 per barrel price cap introduced by the European Union, G7 nations and Australia allows non-EU countries to import seaborne Russian crude oil, but prohibits shipping, insurance and reinsurance companies from handling cargoes of Russian crude unless it is sold for under $60.
Traders have reported to Reuters that Russia is struggling to fully redirect Urals exports from Europe to other markets such as China and India India and is also having a hard time finding enough suitable vessels.
Russia’s problems have been compounded by a shortage of non-western tonnage, moderate demand for the grade in Asia, especially in China and a weak export economy. Indeed, Reuters has reported that Russia’s pipeline monopoly Transneft has been unable to fill some of the available loading slots due to a lack of bids from producers while other slots were postponed or canceled. Only China, India, Bulgaria and Turkey are currently willing to buy Urals with the blend now being sold to export markets at below overall production cost including local levies.
It’s going to be interesting to see the long-term effects of the price-cap on Europe’s and Russia’s energy sector.
Citi’s Global Head of Commodities Research Ed Morse has dismissed the price cap, terming it as silly, impractical and unlikely to work in tight gas markets because gas markets are global and not bifurcated into individual countries, meaning the forces of demand and supply are more likely to prevail in determining gas prices.
As such, Morse says the price cap is likely to lead to gas shortages in Europe especially during winter months when demand is high. Further, the commodity analyst says that getting rid of the TTF natural gas benchmark is likely to cause chaos when determining gas prices especially if other existing benchmarks lack sufficient liquidity.
By Alex Kimani for Oilprice.com
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Alex Kimani is a veteran finance writer, investor, engineer and researcher for Safehaven.com.