Source: Dongzheng Derivatives Research Institute
Report Summary
Trend Rating: Crude Oil: Oscillation
Report Date: December 5, 2022
EU and G7 set the Russian oil price upper limit before the EU embargo sanctions came into effect. At the same time, the EU plans to evaluate and revise the price upper limit every two months from mid-January 2023. Since the outbreak of the Russian-Ukrainian conflict, Urals crude oil exported from Russian western ports has maintained a significant discount on benchmark crude oil at US$20-30 per barrel, while the ESPO price exported from eastern ports is basically above the limit price. The EU and G7 countries have also basically banned Russian oil imports. Price limits are mainly aimed at trade between Russia and India, China and Turkey, with the aim of suppressing Russia's higher income from oil exports while ensuring that Russian supplies remain in the market. Russia has repeatedly reiterated that it will not sell oil to countries participating in oil price limits. Among the major buyers, India has said it will continue to buy Russian oil. The core of the implementation of
price limit is shipping insurance services. Since the conflict, insurance and shipping provided by Russia have begun to appear in Russian oil transactions. In the future, local fleets and non-EU insurance will be crucial to the continued flow of Russian oil. We see that the setting of the price limit of in Western countries in is not significantly lower than the current price range of Russia's major export oil varieties. Western countries, deeply troubled by inflation, do not want Russian supply to be seriously threatened, causing oil prices to soar, which will further aggravate the possibility of inflation and economic recession. From Russia's perspective, oil revenue is an important part of its export revenue, so we believe that Russia still hopes to maintain crude oil exports as much as possible in the future. The short-term market wait-and-see and adapt to sanctions and price limits may lead to a decline in Russia's exports, but since the purpose of price limits is not to squeeze Russian supply out of the market, through the supplement of external fleets and non-EU insurance business, the trend of trade flow changes that have already occurred is expected to remain stable, which will reduce the risk of crude oil being cut off from supplying .
★Investment advice
EU sanctions are about to come into effect, but trade flow changes and recession are expected to hedge against Russia's supply risks. It is expected that the impact of G7 and EU price limits on the current trade flow changes is controllable, and it is difficult to significantly increase the short-term risk premium level, and oil prices are still mainly priced for demand expectations. China's new crown prevention and control measures are gradually optimized, which will increase optimism in the short term, but it is expected that actual demand will still recover slowly due to the impact of the current peak of the epidemic. At the same time, expectations of overseas recession rises, which still suppresses oil prices.
★Risk warning
escalation of geopolitical conflict will lead to a significant increase in the risk of oil prices upward.
report full text
1 The EU and G7 set the Russian crude oil price cap at US$60/barrel
The EU and G7 passed the Russian oil price cap at US$60/barrel before the EU embargo sanctions came into effect. At the same time, the EU will also introduce an adjustment mechanism to regularly evaluate and revise the price cap every two months starting from mid-January 2023, and ensure that the price cap after each revised is at least 5% lower than the average market price. Negotiations on the price ceiling were not smooth, and some parts of the EU were very different. Member states such as Poland and gave very low price proposals, while some major shipping countries such as Cyprus hoped that the upper limit price would be set above US$70 per barrel, and the final compromise was lower than the initial proposed range of US$65-70 per barrel. Since the outbreak of the Russian-Ukrainian conflict, major Russian oil species have maintained a significant discount on benchmark crude oil prices of more than US$20 per barrel. Argus evaluated that the export price of Urals, a port in western Russia, fell below US$60 per barrel in November, and the ESPO price of exports from Kozmino port in the Far East is basically above the limit. How to implement the price cap and who to target: countries participating in the price cap, if the Russian crude oil trading price is below the cap (currently $60 per barrel), they will be allowed to use shipping services provided by the EU and G7, including insurance. The price limit only limits the price of Russian sea crude oil (loading price), covering all Russian oil types. Russian crude oil will no longer be subject to price limit after processing by refineries in the purchasing country, but if Russian crude oil is mixed with another type of crude oil, the mixed oil will still be subject to price limit.The embargo on Russian shipping crude oil and shipping insurance sanctions in the sixth round of EU sanctions will officially take effect on December 5. Bulgaria is allowed to continue importing Russian crude oil from the sea due to geographical reasons until the end of 2024. Since most countries in the G7 have also announced a Russian crude oil embargo, the price ceiling is mainly aimed at trade between Russia and non-EU and G7 buyers such as India, China, and Türkiye.
sets a price ceiling purpose and feedback from all parties: The main purpose of G7 and the EU to implement price limits on Russian crude oil and products is to suppress Russia's higher income from oil exports while ensuring that Russian supply remains in the market. Russia has repeatedly reiterated that it will not sell oil to countries participating in oil price limits. Among the major buyers, India has said it will continue to buy Russian oil and even seek to sign long-term contracts to ensure supply.
2 The impact of the price upper limit on changes in crude oil trade flow
Since the conflict broke out at the end of February, Russian crude oil has attracted new buyers by relying on the price advantage of sharp discounts. The trade flow in the crude oil market has changed smoothly. Russia's crude oil exports even rebounded to a certain extent from March to November, reaching an average of 3.55 million barrels per day. India has become an important new buyer of Russian crude oil, with average exports from Russia to India rising by more than 800,000 barrels per day. Russia's maritime export growth to China has stabilized at around 250,000 barrels per day since the second half of the year. China still mainly purchases ESPO, mainly due to its transportation distance advantage. During the period when the discount on Russian oil exceeded US$30 per barrel in the first half of the year, China's procurement of Urals also increased significantly. Therefore, in the future, the deep discount on Russian oil and as the demand in China gradually recovers, we believe that there is still room for Russian oil to flow to China in the future. Non-EU G7 countries have stopped purchasing Russian crude oil since June, and Russia's exports to the EU have gradually declined, reaching only 600,000 barrels per day in November, a high of about 1.1 million barrels per day. The core of the implementation of
price limit is shipping insurance services. In the past 90% of shipping insurance was provided by the London-based International Group of PI Clubs, and it also relies heavily on the EU's reinsurance services, so Western countries have a monopoly position in the field of shipping insurance. Of course, shipping insurance sanctions are not the first time that buyers can replace shipping insurance business in Western countries by guaranteeing by sovereign or enabling domestic Russian insurance institutions. Russia's fourth largest insurance company, Ingosstrakh, and the Russian State Reinsurance Company (RNRC), which owns holding , have taken over the third-party liability insurance and reinsurance projects of the Russian fleet. India and Turkey have begun to use insurance services provided by Russia, and China's attitude is unclear. From the perspective of capacity, although Russia's state-owned Sovcomflot has the world's largest fleet of medium-sized tankers (Aframax and Suezmax), it lacks the VLCC tanker with the best economical economy in ocean transportation. Market rumors have begun to use the older fleet facing scrapping and the sanctioned oil transport fleet that used to transport Iranian oil to supplement its capacity. Among the main buyers, India's state-owned fleet has relatively small transportation capacity, but China has huge VLCC transportation capacity, but insurance is a problem that needs to be solved. The future local fleet and non-EU insurance will be crucial to the continued flow of Russian oil.
We see that the setting of the price ceiling in Western countries is not significantly lower than the current price range of Russia's major export oil products transactions. Setting the price ceiling actually provides a certain room for improvement for shipping sanctions in the sixth round of EU sanctions. Western countries, deeply troubled by inflation, do not want a serious threat to Russian supply, which leads to a surge in oil prices, which in turn further aggravates the possibility of inflation and recession. From Russia's perspective, oil revenue is an important part of its export revenue, so we believe that Russia still hopes to maintain crude oil exports as much as possible in the future. Therefore, the market wait-and-see and adapt to sanctions and price limits in the short term may have a certain impact on Russia's exports. However, since the purpose of price limits is not to squeeze Russian supply out of the market, through the supplement of external fleets and non-EU insurance business, the trend of trade flow changes that have already occurred is expected to remain stable, which will correspondingly reduce the risk of crude oil supply cuts.
3 Investment advice
EU sanctions are about to come into effect, but changes in trade flows and recession are expected to hedge the Russian supply risks. It is expected that the G7 and EU price limits have relatively limited impact on the changes in the current trade flow, and it is difficult to significantly increase the short-term risk premium level, and oil prices are still mainly priced for demand expectations. China's COVID-19 prevention and control measures are gradually optimized, which will increase optimism in the short term, but it is expected that actual demand will still recover slowly due to the impact of the current peak of the epidemic. At the same time, expectations of overseas recession rises, which still suppresses oil prices.
4 Risk warning
Geographical conflict escalates will lead to a significant increase in the risk of rising oil prices.
This article is from industry information
