Home Finance & Markets All eyes are on India and China after the EU oil price...

All eyes are on India and China after the EU oil price cap and the Russian Gas stoppage

G7 countries have decided to introduce a ceiling on the price of Russian oil from December 5. The price cap is unknown yet, but it is expected to be $40-60 per barrel. Gazprom announced that the Nord Stream pipeline will not restart on Saturday. Russia thinks limiting the price of oil would likely only lead to its shortage in Europe and an increase in its cost for consumers. Success will depend on whether countries outside the Western sphere are ready to comply with it. Especially large consumers of oil are India and China. Russian oil exports in August reached the highest level in history. Russia may refuse to export oil at imposed low prices, even to the detriment of its own income. An explosive rise in prices can happen on the world oil market - Brent quotes can soar in December to $120-130 per barrel.

Russian gas

The G7 countries have decided to introduce a ceiling on the price of Russian oil from December 5 to cut Moscow’s revenues and limit the impact of the war on energy prices.

Washington assumes that Russia is determined to continue supplying oil to the world market and is ready to “swallow” even greater discounts than exist now. The price cap is unknown yet, but it is expected to be $40-60 per barrel.

At first, the Kremlin reacted by guaranteeing that it would not sell oil to those who applied the ‘price cap’.

In the evening, Gazprom announced that the Nord Stream, the main pipeline for the transport of Russian gas to Western Europe, will not restart on Saturday, as was expected after three days of maintenance: after the “failures and damage” identified, it said, “gas transportation” has been “completely stopped”.

The wait for the Nord Stream to restart on Saturday had sent gas prices into free fall, with Ttf futures, a reference for the cost of natural gas in Europe, down 11.7% to 214 euros. Concerning the oil ceiling decided by the G7, it remains to be understood what modalities it will have, what the threshold will be, and how the other large oil buyers, such as India and China, will react. As for the work in the EU to combat energy prices, the priority, von der Leyen pointed out, remains that of saving energy, “especially at peak times”.

The wait is for the extraordinary Council of Energy Minister’s discussion on September 9. Von der Leyen could then announce specific measures in the State of the Union speech on September 14. Returning to the G7, she expressed the commitment made at the Elmau summit will prevent Russia from profiting from the war on Ukraine. She said the joint political intention was to finalize and implement an overall blockade of services that allow maritime transport of crude oil and petroleum products of Russian origin worldwide. The provision of such services would be permitted if the petroleum and petroleum products were purchased at a price equal to or below a value (“price cap”) determined by the new mechanism.

For the Europeans, the Russian blackmail is clear to everyone; among other things, the increase in prices established by the TTF favoured the Russians because they gave EU less gas at a higher price, allowing them to earn a lot of money to finance the war. Europeans feel that Russia cannot suspend supplies quickly because it has no other pipeline to put this gas and sell it elsewhere. It’s a game of poker.

Russia thinks limiting the price of oil would likely only lead to its shortage in Europe and an increase in its cost for consumers, considering the cost of transportation.

India and China

As mentioned, the plan’s success will depend on whether countries outside the Western sphere are ready to comply with it. Especially large consumers of oil are India and China. Experts and politicians say there is little chance of this, writes the WSJ. Now Brent oil is trading at $96 per barrel. At the same time, Asian buyers purchase raw materials at a $20 discount.

A few months ago, after the EU sanctions on oil, Russian oil company executives solved the supply issue by simply redirecting oil tankers to Asian markets. So, in July, China and India accounted for about 42% of Russian oil exports compared to 32% in 2021. At the same time, oil production in Russia remains high. According to the Institute of International Finance (IIF), Russian oil exports in August reached the highest level in history. 

If G7 imposes a shipping ban, Russia may simply refuse to export oil at imposed low prices, even to the detriment of its own income. Russians think their economy is already at its lowest and can only move upwards now. Therefore, one should not rule out detours and some soft scenarios in terms of volumes and prices for Russian oil exports. In this case, an explosive rise in prices can happen on the world oil market – Brent quotes can soar in December to $ 120-130 or more per barrel.

China is the largest consumer of Russian oil, and ships are not required to move oil to its refineries. As the country is already at odds with the west and a Russian oil blockade is not in its interest, China may continue to purchase Russian oil at low prices.

India, although boisterous, may be more amiable to the West as it is already cutting down on its oil purchases from Russia.

The scenario of an oil embargo is quite real, and its circumvention will not be easy for Russia. The Russian Finance Minister Anton Siluanov says the traditional focus is on Russia’s attempts to enter markets free from restrictions. He said it’s difficult and costly for Russian companies, but it’s hard to say how long these restrictions will last.

NO COMMENTS

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Exit mobile version