Russia - General Discussion.
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Ananda
The Bunker Group
If they pay less for Russian oil, it is because of the market dictate, and not some Western politics whims. Russian crude oil will traded on discount from some other similar qualities, since there's premium on transporting them for one thing. However it is dictated by market.
This is that current politicians in west (in fact much politicians around the globe) have some illusion that politics can dictate market. Politics can influence market decision, but market will make adjustment by their own mechanism. Which in most time independent in results from political goals.
Remember hydrocarbon supplies is finite. When non west market taken Russian hydrocarbon, means the other suppliers (from Africa, America or some in Middle East) already send their supplies to Euro zone which use to be service by Russian.
China And India Buy Russian Crude Above The Price Cap | OilPrice.com
China and India have been buying up Russian crude oil at prices above the $60 per barrel price cap set by the G7.
oilprice.com
Don't get me wrong, Russian still sell cheaper then OPEC in most of Asia. However that's because market positioning and not because some G7 political moves. I have put several factors that create that situation but I put it again:
1. Premium on transportation costs, as Russian has to find new tankers to take their hydrocarbon (which usually piped to Euro zone),
2. Euro zone has to find new suppliers to replace Russian ones, and that will cost them premium. In such those suppliers to Asia find they can charge more premium to Euro zone, and decided to sell to higher bidder.
3. Russian also can still afford discount margin, as their products (like Urals) has one of lowest production costs (among Russian oils) . Their new Siberian fields usually that has higher production costs. Still above their sell price to Asia, this they can afford lower margin to entice new market. Big part of cost also related to Russian Tax.
Russian Oil Production Among Most Expensive in World - The Moscow Times
Russia is one of the most expensive places in the world to produce oil, new analysis produced for Saudi Arabia’s state-owned oil giant Saudi Aramco has found.
www.themoscowtimes.com
All of that shown actual pricing decided by market including positioning, and not by political whims factor like this price cap.
Well I don't replicate that chart, I only put link to their sites. If I replicate their chart on say any media, then I have to get written consent.
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A Task & Purpose video on the Indian and Russian relationship and how complex it is. It also discusses BRICS and Indian defence strategic requirements. Very well worth the watch and I think a good explanation.
contricusc
Member
In the end, it is always the market that dictates the price. But the markets are also influenced by political decisions. In this case, the price cap means that above that price there are fewer transporters and insurers for Russian oil, and many buyers who don’t want to deal with shady operators will opt out of buying from Russia above the cap. This means less demand for Russian oil above the cap, which means lower price.
It is much harder to get financing, insurance and transport for Russian oil above the cap, so at least a part of the demand is affected. Of course that if there is a big margin of profit to be made, there will be buyers, but there needs to be a significant discount in order to incentivize buyers to take the additional risks of working with sanctioned oil and shady shipping companies.
Urals sells for $18 less than Brent for a reason.
Ananda
The Bunker Group
Well I already put it, politics can influence market, but politics can not dictate market. Market can make their own adjustment, and this G7 price cap will not dictate market.
That's why market people find it laughable for any pundits that say politics can dictate market. That can not, and long term trend already shown that. People will buy Russian oils on the market negotiate traded prices, and not this price caps.
Remember they will be harder to find Insurance brokerage in Western market to cover the insurance above that USD 60 cap. However it is from Western financial markets. From other financial markets you still can find other brokerage to cover it. It will cost more premium which make results #1 that I have put previously.
This is related to my others posts, weaponising Western financial markets will only give incentives to other financial markets. This time around it will still cost more then Western financial markets. However if people being given incentives, those markets can grown to rival Western ones. That's just part of market mechanics.
Again remember hydrocarbon is finite supplies, if Eurozone out bid and take Asian traditional suppliers, Asian will then have to take Russian ones.
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contricusc
Member
Actually this was the entire idea behind the price caps. Since oil supplies are finite, it is not in the interest of importers (Europe and Asia mostly) for supply to be taken out of the market, as this would increase prices exponentially. This is why Europe needed to come up with a plan where Russia can continue to sell its oil in order to keep the market supplied and the prices low enough, while at the same time to find a way to hurt Russia’s revenue from the oil exports. They came up with the price cap idea, which is not perfect but it serves its purpose to some degree.
The idea behind the price cap is to keep Russian oil at a significant discount to Brent, but at the same time allow Russia to continue to sell its oil in order to keep the market well supplied and prices low. As long as Russia is forced to offer big discounts on its oil, the strategy works in the sense that Russia earns less from its oil sales without creating a supply crunch and sending the prices to the moon.
The big beneficiaries of this strategy are Asian importers of Russian oil (China, India and Turkey mostly) as they are able to buy oil below the normal market price. It is basically a wealth transfer from Russia to India and China, which the EU considers a good deal at the moment, because it hurts Russia during a time when Russia is at war with a potential future EU country.
Of course, the reverse of the benefit of weakening Russia is the strengthening of China, which benefits from cheaper oil compared to European countries and has a competitive advantages when it comes to all things involving the use of imported fuels.
While the price cap is far from perfect and has many flaws, it serves its purpose to some extent. But generally speaking, I agree with what you say regarding the market being always stronger than political will, and always finding a way to balance itself.
Supply and demand is what rules the world. Politicians can only influence supply and demand to some degree, and if they try to use their influence excessively, the market always finds ways to counter them.
Ananda
The Bunker Group
Problem for me with this Price Cap policy is what purpose it serves? Without it Market mechanics already make Russian must sell their oil at discount to Asian, by mostly one big factor, transportation costs. It is more costly simply to bring tankers from Russian ports to Asia then from Middle East to Asia.
Factors like new routes, new insurance providers matters, but more importantly just simple transportation costs. So without this 'price cap' policy, Urals already sold USD 15-20 range cheaper then Middle East averages to Asian buyers anyway.
Western policy to close their market (physical and financial) is much more matter then this price cap policy. This policy so far actually just more like G7 politicians chest pumping purpose. However what's laughable for many in market is this insistence by those Western politicians pundits in media that call this price cap that make Russian oil traded lower.
That's just simply taking credit for a policy that not making any substantial changes from what market mechanics done. Market mechanics that make Russian oils traded lower, not this useless price cap policy. West already spend much of their munitions when they're weaponising their financial markets and currencies on Russian trades. After that not much they can do, as Market mechanics already taking over adjustment needed.
Is this Price Cap going to forbid Asians trading Russian Oils above caps? No it won't. Current traded prices shows that. Is this policy going to make non western markets insurance brokerage to avoid covering Russian oil transportation? No it won't. Markets mechanics that matters, markets mechanics that dictate why Russian must sell cheaper. Not G7 chest pumping policy.
For that we agree that supply and demand that rules the world, and politics just riding along.
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contricusc
Member
It won’t make non-western insurance brokers to avoid covering Russian oil transportation, but it will allow them to charge more, because they won’t have competition from Western insurers and will invoke the risks of bypassing the price cap. The same happens with the shadow fleets of tankers that will transport Russian oil. They will charge more because the Russians have no alternatives.
What the price cap actually does is to reduce options for insurance, financing and transportation above a certain price, which means that insurance, financing and transportation will get even more expensive for the Russians above the price cap. The end result is that some of the money that the Russians would normally get as profit would go to the non-western providers of insurance, financing and transportation, as they will be able to charge higher rates because of lack of competition.
Ananda
The Bunker Group
Before this price cap policy actually it is already premium additional prices to get any insurance for Russian oils, gas and other trades. This happen due to initial Western weaponising their financial markets and currencies. This is why I said this Price Cap policy is useless policy. It's goods is only for political chest thumping, but not affecting markets mechanics anymore.
Again, when West closing access to their financial markets and currencies for Russian trades (ie weaponising their financial institutions), West already used most of their arsenals to influence Russian trades.
This price cap policies had no influence to the Russian switching trades to non West and using non West financial institutions. Those already done and switched as results on previous policies. Not this price cap policy.
contricusc
Member
The price cap adds additional problems for those buying Russian oil, on top of the initial financial sanctions.
When it comes to shipping, you will notice that when oil is below the price cap, the majority of Russian oil is shipped by Greek shipping companies. But if the price goes above the cap, the Greeks can no longer ship the oil, so Russia has to resort to shadow fleets which are more expensive and unsafer (Needing a higher insurance premium).
As for the non-Western financial system and the price cap, here are some news from recent days:
India Banks Refusing to Settle Russian Oil Bills Above Price Cap
Indian banks have told authorities they won’t process payments for oil priced above the cap set by the G-7, according to people with knowledge of the matter, a challenge for the world’s most populous nation that is counting on cheap crude to keep inflation in check.
/cloudfront-us-east-2.images.arcpublishing.com/reuters/5P7APPIE5FI4XMUZIJMFFTL6VI.jpg)
Exclusive: India's Bank of Baroda stops clearing payment for above-cap Russian oil - sources
India's Bank of Baroda has stopped clearing payments for Russian oil sold above the price cap set by the West from this month, three sources with direct knowledge of the matter said, a move that could expedite transition to a rupee trade mechanism.
www.reuters.com
So the price cap does place additional burdens, on top of the initial sanctions.
The Moscow Times reports that although there is more volume of exported product the revenue is down 15.7 billion dollars
Russia’s Oil Export Revenues Fall One-Third Due to Western Price Cap – Study - The Moscow Times
Russia’s Oil Export Revenues Fall One-Third Due to Western Price Cap – Study - The Moscow Times
Ananda
The Bunker Group
India and China snap up Russian oil in April above ‘price cap’
Russia is enjoying stronger revenues via oil sales despite the West’s attempts to curb funds for its war in Ukraine.
www-aljazeera-com.cdn.ampproject.org
There's going to debates on how effective this Price Cap on costing Russian oil trades. So feel free to continue see this policy as policy that matter to real trade costs. For me (and I can tell you many energy commodity traders that I know), see this policy nothing more then political chest pumping. Not going to affect market mechanics as Western financial sanctions before that doing it.
The real traded prices doing same thing before this policy, as Russian oils already traded in discount. This policy not changing that difference more (as West hope) then before this policy effect. There's going some Non Western Banks that going to tread carefully, especially those who done much trade with West. However this is already happening due to Western financial sanctions to Russian trade before. The main point this policy is not changing the market dynamics as being hyped by Western pundits and media.
Western politicians is going to try come out for more 'sanctions' to Russian trade. However the only thing that they can do to increase the pressure is by 'sanctions' those that buying Russian hydrocarbons export. This means put sanctions to Non Western market. So it is up to Western Politicians if they want to include the non Western buyers as trade war target.
That's my point all along. Nothing much Western politicians can do to Russian trade, as they're already use their financial aresenals, before this Price Cap implementation. So are West going to attack non western buyers trading using non western financial systems? Because that's what left that West can do. Increase the attacking to the buyers.
Quoting Ukrainian Think Tank. Not much different with Western think tank that see this policy work by analysing effect leveraging global oil price down. Well every oil producers revenue is down in Q1 this year.
This article shows that Russia will be altering its taxes to regain revenue lost but statistics provided may be as clear as mud
Russia alters oil taxes to capture bigger share of trades above price cap | Financial Times
Russia alters oil taxes to capture bigger share of trades above price cap | Financial Times
contricusc
Member
It is not in the interest of the West to attack the buyers, because it would strain relations with important countries, while at the same time it would boost the oil price in case Russian oil actually exits the market. The West wants Russia to keep selling oil, but it wants to make it much harder and expensive to do it, and to force them to sell to unreliable buyers who may buy on credit and may have difficulty paying them. The idea is to keep the Russian oil on the market while forcing Russia to receive less money for it.
What I think the West should actually do is to put pressure on OPEC to increase production, instead of the production cut they are currently doing. The West would have the support of China and India for such pressure, because they would also benefit from lower prices.
Ananda
The Bunker Group
Is the West thinking the 'unreliable buyers' is most of the Asian? Because even tough most of Crudes going to China and India, the refineries in India and China process those Crudes and sell it to the rest of Asia. So unless West want to punish most of Asia or even some in South America, there's nothing much financial instruments that West can do. Again West already uses their financial and trades arsenal even before this Price Cap policy.
Good luck with that, and basically West already done either by bilateral, multilateral or using International Agency to push OPEC. So far OPEC going to their own way and covering their own interest. If West can't dictate OPEC in 70's, why do you think they can do it now? OPEC will cut or increase their production when their interest and market situation demand that, not based on what West politicians demand.
OPEC Bites Back At IEA Over Production Cut Warning | OilPrice.com
On Tuesday, OPEC issued a warning of its own to the IEA: your calls to stop investing in oil and gas is what could lead to future price volatility
oilprice.com
KipPotapych
Active Member
For the sake of simplicity, assume there are two sellers and five buyers of the product, namely oil in this case. The sellers are the ones who basically set the price of the product by setting the production targets according to their (global) economic forecasts and other factors (being political influence, control of competition, etc), while being limited by the production capacity. The demand for the product is more or less inelastic; in other words, the demand is not greatly affected by the price of the product (within a reasonable range). In the world where everything is fine, the 5 buyers import the product from the 2 sellers. One of the buyers is very dependent on the supplies from one of the sellers, which probably isn’t relevant to the discussion. Something happened and the world is no longer fine. Two of the five buyers in this new “not fine” world refuse to import the product from one of the sellers and try to increase their purchases from the other seller. The problem arises where all 100 units of the product offered to the world (the five buyers) have been all allocated to certain buyers and have always sold and there is no excess supply (one of the reasons being, as mentioned above, the producers set these production targets).
Now there is a dilemma because this market has been set up for quite a while with rules and delivery routes well established. The seller that is now being “shunned” exports about 13 of the 100 units available for global imports. In the short term, this is a big issue due to the established supply routes, contracts, etc. One of the two “shunning” parties now has to somehow get a significant chunk of the remaining 87 units of the product from the other seller. However, all of these 87 units are always allocated among all participants in the market (including this now desperate party itself). So the only way to capture a larger share of the 87 units available is via paying a higher premium and/or negotiating new contracts. The other “shunning” party, in the meantime, keeps dumping the precious product out to the market from their own strategic reserves (in unprecedented quantities) because, by their standards, they are suffocating the consumer at the pump. This, in turn, helps the other buyer(s) as well; however, the sellers say they are going to cut production as a result.
At this point, everyone understands that nothing is easy, yet the product is in demand no matter what, as long the world keeps rolling (the dream of eliminating dependance on fossil fuels is almost as far as (or even further than) it was when the world was “fine”), so both sellers will be able to sell it at market prices (they themselves set) once the new means of delivery are found. The two “shunning” buyers also realize that they basically control the financial market to a great(est) degree and that market includes insurance. They also realize that the established delivery ways via pipelines, which are the cheapest, most efficient, safest, environmentally friendly, and reliable, are no longer an option for a good chunk of the “shunned” seller’s output and that sea is the only viable alternative. This option would require sea vessels being insured by the buyers’ financial industry. Since this post is already way longer than it should be, long story short, the two “shunning” buyers set the “price ceiling” for the “shunned” seller’s product in order for the delivery means to be insured.
Here we arrive at another dilemma. Now from the “shunned” seller’s perspective. The seller cannot just stop production, so they simply dump their output to the willing buyers at huge discounts. Whatever means necessary, so to speak. The transportation costs are pretty insane and some companies made big bank on those deliveries. On the receiving end, the refineries made bank as well because they basically refined the raw product from the “shunned” seller and sold it to the “shunning” buyers, who paid a premium for the same product. However, the premium went to the pockets of the other buyers now and not the “shunned” seller. The fact that at least one of the greatest beneficiaries of the situation is the evil competitor and (now declared) adversary is not necessarily relevant in the eyes of the “shunners”. It is also not necessarily relevant that the same amount of oil is now being pushed around the world in the least safe manner with ridiculous environmental impact. The scheme, however, does so far proves to be meeting the goals of the “shunners”: while still using Russian hydrocarbons they pay more for, Russia is the one benefiting less from selling them.
Time, of course, doesn’t just pass by. Russia is looking to build and buy any tankers they can (some in questionable shape, raising even more environmental concerns). Others are looking to make profit. Russia is also implementing laws in place that the oil is not to be sold below a certain discount, which is still substantial, but the goal is to minimize it and eliminate in time. Everyone also knows that the product will sell regardless because there is no alternative. While there is a buck to be made, those who can make it will pay more as long as there is that buck to be made, which is economics 101: in other words, as long as there is any discount on the product with limited supply that can be processed (or simply mixed with other product from a different seller) and sold for profit, there will be buyers for that product. The same is true for shipping: as long there are substantial profits to be made, there will be more of those willing to get their chunk entering the market (until there are enough players and the profit is no longer attractive or worth the hassle) or some start providing discounts on shipping (until there is profit that is no longer attractive or worth the hassle or no profit at all). This is where the greatest “discount” will come from until the market stabilizes and finds ways to work more efficiently again.
In essence, we currently have about the same amount of oil moving around the world with much higher environmental risks and impact, which we have been promising to reduce for years. We also have some (much?) of the same oil being indirectly purchased by the same buyers (the “shunners”) who now pay more for it than they would otherwise, but a small chunk of profit is (temporarily) being distributed between additional beneficiaries, some of whom we declare to be our adversaries.
Another note to keep in mind, currently all of the comparisons are made to the previous period, the period of record revenues and profits by the entire oil and gas industry and Russia in particular. Here is a comparison to the period before that, which instead was on the lower end (borrowed from a Reuters article):
Here is another interesting graphic from Statista for 2020:
We can kick it back and forth all we want, but there is always only x amount of oil available on the market and x (not y) amount of oil is consumed in the same market, with some temporary deviations from this rule. And this is the key point to this whole discussion. Once the market “reorganization” is complete, there will be the so-called efficiency again, with standard delivery routes and price setting that will not be dictated by some arbitrary price caps set by some of the participants of this market. Some may choose to buy from certain producers and ignore others, but other players won’t because of the increased costs of, really, the most important resource for economic development/prosperity and that resource being energy.
Of course, we should not forget that the American strategic reserves that were carelessly, in my opinion, dumped need to be refilled. The plan to start refilling them was set to begin at about $70 per barrel, which the Saudis and others so far said a hard and firm no to.
And lastly, none of the big (or little?) boys in the oil industry, Canada, Norway, and the USA itself aside, supported the western ideas about how to deal with the war in Ukraine. Or even accepted the origins and premise of the invasion as we publicly interpret them to be to begin with.
contricusc
Member
In essence, what you describe is the current situation in the oil market. The problem right now is OPEC, which is basically helping Russia to defend its market share despite the pressure from the West to replace some of the Russian oil from the market.
Before OPEC announced the price cut at the beginning of April, the Urals blend was selling at $51. Two weeks later after the announcement, the price was $66. What OPEC did was to sabotage the efforts of the West to reduce Russia’s revenues from oil exports.
Instead of pumping at high capacity in order to replace Russian oil and force Russia to reduce output taking some of their market share, OPEC decided to help Russia by making their oil extremely necessary.
If Western leaders had any backbone, they would have treated this as an act of economic war, but instead they are pretending nothing is happening. OPEC should have not been allowed to exist, just like corporations are not allowed to form cartels.
contricusc
Member
Most of the oil that Asian countries buy doesn’t come from Russia. Now, let’s take India for example. It imports oil from various sources, only part of it coming from Russia. The big and serious Indian corporations importing oil will not buy from Russia, as they have a reputation to defend and don’t want to have problems with sanctions or to deal with shady transporters and insurers. The ones buying from Russia will be the companies willing to take more risk with little regard to reputational damage. Those companies are what I call “unreliable buyers”, as they are a lower quality category of buyers. Some of them may have problems and delays with payments. It would be interesting to know what payment terms they get, and if there are arrears with some of them already. Russia is basically selling in a black market for oil.
This is because Western politicians are weak and are not united. Even the existence of OPEC is an affront to all oil importing countries. Now think about it this way. Who are the biggest oil importers in the world? The EU, the US, China, India, Japan, South Korea… Now compare the power of the listed countries with the power of OPEC countries. Do you think that the buyers would not be able to bully OPEC if they decided to cooperate and form a buyer’s syndicate? The problems is that big countries are not able to put aside their differences and cooperate on this issue, and put an end to the obscenity which is OPEC.
Corporations are not allowed to form cartels and gauge prices. Why are oil producing countries allowed to do this is beyond my understanding. The NOPEC bill should have been sent to Congress and made law, instead of being kept as an eternal threat that is never actually implemented.
Now that OPEC is directly helping Russia in its war effort by cutting production and lifting the price Russia gets for its oil during a time of war, the case for dismantling OPEC is stronger than ever.
Ananda
The Bunker Group
The ones that buy Russian oil are big Refineries and big oil companies including Asian SOE's. Not some small speculative buyers. Unless you can shown the ones that buy Russian oils are small companies (perhaps you have more valid data then the traded ones), then what your putting is just another wild speculations.
For one thing most are increasing Asians, but that's not make them unreliable buyers. Trading oil most of times base on real cash transactions. Unless because they are not Western buyers, are you saying they are unreliable?
Russian oil increasing goes to Asian, and that's the fact on traded data. Not just speculations.
Seems you are still think that West power to influences OPEC is huge. Again they cannot do it in 70's, why do you think they can do it now. OPEC as always going to cut or increase their production base on their interest and market demand.
All you have put is just another theoretical dreams, not base on realities.
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We have previously touched upon the issue of Russian emigration and the direct and indirect impact of both the war in Ukraine, the Russian mobilization, and also the general move toward a more autocratic society (also causing emigration), have all combined to have a massive negative impact on the Russian labor market. A short analysis related to this: Branislav Slantchev on Twitter: "https://t.co/Jj5D5TjhI2" / Twitter
The number of Russian workers between in the age range 19 -- 35 has decreased by 1.34 million in 2022, the largest decline since the fall of the USSR.
Russia has a "demographic hole" due to economic crisis in the 1990s that cause a collapse in birth rates 1993-2006. However, this does not explain reduction in other age groups, which is most likely explained by a combination of emigration, people killed/wounded in the war, and people mobilized.
The combination of all these factors (demographic hole due to economic crisis in 1990s; emigration; war in Ukraine) is creating a "perfect storm" that will hit Russian production massively. And it is only going to get worse.
The number of Russian workers between in the age range 19 -- 35 has decreased by 1.34 million in 2022, the largest decline since the fall of the USSR.
Russia has a "demographic hole" due to economic crisis in the 1990s that cause a collapse in birth rates 1993-2006. However, this does not explain reduction in other age groups, which is most likely explained by a combination of emigration, people killed/wounded in the war, and people mobilized.
The combination of all these factors (demographic hole due to economic crisis in 1990s; emigration; war in Ukraine) is creating a "perfect storm" that will hit Russian production massively. And it is only going to get worse.