You discuss the market for Russian oil and refined products being restricted if the price cap holds firm (ie if Brent doesn't rise too much). What's to stop these being laundered through China, India etc at a markup to embargo obeying countries?
As for Europe and the other OECD nations weaning themselves from Russian oil, this can only happen if they find replacements from other oil producers (the green divestment fantasy will not happen). This would only occur by these nations driving up the price of their oil purchases which must drive up Brent and cause shortfalls for other nations. These poorer nations will then buy Russian oil and refined products (directly or laundered) to supply their needs at affordable prices. The only scenario I can see for demand for Russia products collapsing is a worldwide recession crushing general demand.
Russian crude has many buyers besides Europe, and Russia has so far managed to find alternate customers for all of its exported crude volumes.
Refined products (e.g., diesel), isn't in demand by India, China, et cetera--they buy the crude and refine it themselves, so the more crude they buy the less interest they have in buying the refined products.
As for the "laundering" angle: Russia has three ways to deliver crude and refined products--seaborne, pipeline, and rail. They can deliver both into Central Asia by rail, but the pipelines that support Urals crude all go west. A few pipelines enter Turkey, but the rest terminate in Europe, or at the terminals in Primorsk, Novorossiysk, and Ust-Luga, after which it goes by tanker.
In order for Russia to be able to "launder" crude through China (as an example), it would have to be able to deliver crude by either rail or pipeline to China, then have China resell the crude as theirs, passing the bulk of the sale price back to Russia. It can't deliver the oil via tanker because cargo shipments have quite detailed paper trails.
What CAN happen, however, is that China, India, Singapore, et cetera, buy Urals crude at a deep discount, mix in a very small amount of some other crude, then resell it on the market (basically back to Europe) with a hefty markup. This is happening right now, and it's a nice profitable bit of arbitrage for China, India, et cetera, but the resale doesn't put a penny in Putin's pocket.
The laundering I refer to our basically what you outline in your final paragraph. The fleet of tankers that Russia has amassed can handle much of the shipping since Russia is willing to insure the deliveries. Yes, Russia doesn't get any of the markup but still gets to sell its oil.
I think the major difference in our view is the global demand for refined oil products. I just don't see the slack in the markets that you do. At worst, of there truly aren't willing buyers for their refined products, the Russian refineries have to cut output to sell more crude to foreign refineries & hence overall margin falls but the limiting factor here is the current capacity of these refineries that are suitable for the Russian crude grades - they still need feedstock and the other oil producers don't have that much excess capacity.
Keep in mind that the entire rationale for the price cap is to keep Russian oil on the market. The stated position of the EU/G7 is that Russia can sell its oil, just for no more than $60/Bbl. So there's no issue with the purchase/resale of Urals crude in the "laundering" modality you mentioned. And while India notionally is not backing the price cap, they are only too happy to make money off of it (and they are).
There is a large global market for refined products, but the market for RUSSIAN refined products is more or less Europe. When India and China buy Russian crude, it flows into Indian and Chinese refineries--to make the very refined oil products that Russia sells to Europe. By buying Russian crude, they have less demand for Russian refined products.
Now, as you point out, this might play out with Russia producing less refined product volume and selling more crude volume, with India and perhaps even China buying the crude and then re-exporting refined products back to even Europe. As economically insane as that is, that's a very real scenario under the price cap regime. If that's the case overall Russian oil production might not fall all that much.
So long as the price caps hold, the EU and G7 nations are okay with that outcome; the goal is not to keep Russian crude from coming to market, but to keep Russia from profiting much if at all from that crude. At the current discount being applied to Urals crude, Russia is believed to be selling its oil more or less at cost. They generate enough revenue to keep the oil flowing but there's no money left over (presumably) to fund Putin's war in Ukraine. At the moment, the price cap appears to be achieving that objective.
But if India, China, and other countries do not choose to re-export refined products, an EU ban on Russian refined oil products plus a price cap for everywhere else could result in Russia having to curtail production and shut down various wells and possibly entire fields. If the projection of 1 million barrels per day reduction in Russian output is accurate, that's a significant percentage of Russia's overall output.
As I noted in an earlier article, this is one of the unstated risks of the price cap--if Russian oil is forced off the market and they have to shut down oil wells, they may have a problem bringing that idled capacity back online in the future. Wells don't do well just sitting idle, and a large portion of Russian wells are in permafrost--if the oil stops coming up the well any water that comes up with it is likely to freeze, which could damage the well itself, making the shutdown more or less permanent. Russia is already showing signs of inability to bring capacity idled during the pandemic lockdowns back online, and this was before the sanctions and the price cap began starving Russia of oil revenues.
How long this economically distorted way of bringing Russian oil to market can endure is, I think, primarily a function of the price for Brent crude. The higher it goes, the more pressure there will be for Urals crude to exceed the price cap. There was already one closing above the price cap amount so the cap CAN be breached. The awkward questions will all come in when/if Urals crude closes above $60 and stays there. If that happens the EU has to either take steps to force Urals crude off the market altogether, which would push Brent even higher, or abandon the cap.
Either way, there are some large ramifications for global oil markets which come to bear this year.
You discuss the market for Russian oil and refined products being restricted if the price cap holds firm (ie if Brent doesn't rise too much). What's to stop these being laundered through China, India etc at a markup to embargo obeying countries?
As for Europe and the other OECD nations weaning themselves from Russian oil, this can only happen if they find replacements from other oil producers (the green divestment fantasy will not happen). This would only occur by these nations driving up the price of their oil purchases which must drive up Brent and cause shortfalls for other nations. These poorer nations will then buy Russian oil and refined products (directly or laundered) to supply their needs at affordable prices. The only scenario I can see for demand for Russia products collapsing is a worldwide recession crushing general demand.
Russian crude has many buyers besides Europe, and Russia has so far managed to find alternate customers for all of its exported crude volumes.
Refined products (e.g., diesel), isn't in demand by India, China, et cetera--they buy the crude and refine it themselves, so the more crude they buy the less interest they have in buying the refined products.
As for the "laundering" angle: Russia has three ways to deliver crude and refined products--seaborne, pipeline, and rail. They can deliver both into Central Asia by rail, but the pipelines that support Urals crude all go west. A few pipelines enter Turkey, but the rest terminate in Europe, or at the terminals in Primorsk, Novorossiysk, and Ust-Luga, after which it goes by tanker.
In order for Russia to be able to "launder" crude through China (as an example), it would have to be able to deliver crude by either rail or pipeline to China, then have China resell the crude as theirs, passing the bulk of the sale price back to Russia. It can't deliver the oil via tanker because cargo shipments have quite detailed paper trails.
What CAN happen, however, is that China, India, Singapore, et cetera, buy Urals crude at a deep discount, mix in a very small amount of some other crude, then resell it on the market (basically back to Europe) with a hefty markup. This is happening right now, and it's a nice profitable bit of arbitrage for China, India, et cetera, but the resale doesn't put a penny in Putin's pocket.
The laundering I refer to our basically what you outline in your final paragraph. The fleet of tankers that Russia has amassed can handle much of the shipping since Russia is willing to insure the deliveries. Yes, Russia doesn't get any of the markup but still gets to sell its oil.
I think the major difference in our view is the global demand for refined oil products. I just don't see the slack in the markets that you do. At worst, of there truly aren't willing buyers for their refined products, the Russian refineries have to cut output to sell more crude to foreign refineries & hence overall margin falls but the limiting factor here is the current capacity of these refineries that are suitable for the Russian crude grades - they still need feedstock and the other oil producers don't have that much excess capacity.
I'm glad to have found your substack
Keep in mind that the entire rationale for the price cap is to keep Russian oil on the market. The stated position of the EU/G7 is that Russia can sell its oil, just for no more than $60/Bbl. So there's no issue with the purchase/resale of Urals crude in the "laundering" modality you mentioned. And while India notionally is not backing the price cap, they are only too happy to make money off of it (and they are).
There is a large global market for refined products, but the market for RUSSIAN refined products is more or less Europe. When India and China buy Russian crude, it flows into Indian and Chinese refineries--to make the very refined oil products that Russia sells to Europe. By buying Russian crude, they have less demand for Russian refined products.
Now, as you point out, this might play out with Russia producing less refined product volume and selling more crude volume, with India and perhaps even China buying the crude and then re-exporting refined products back to even Europe. As economically insane as that is, that's a very real scenario under the price cap regime. If that's the case overall Russian oil production might not fall all that much.
So long as the price caps hold, the EU and G7 nations are okay with that outcome; the goal is not to keep Russian crude from coming to market, but to keep Russia from profiting much if at all from that crude. At the current discount being applied to Urals crude, Russia is believed to be selling its oil more or less at cost. They generate enough revenue to keep the oil flowing but there's no money left over (presumably) to fund Putin's war in Ukraine. At the moment, the price cap appears to be achieving that objective.
But if India, China, and other countries do not choose to re-export refined products, an EU ban on Russian refined oil products plus a price cap for everywhere else could result in Russia having to curtail production and shut down various wells and possibly entire fields. If the projection of 1 million barrels per day reduction in Russian output is accurate, that's a significant percentage of Russia's overall output.
As I noted in an earlier article, this is one of the unstated risks of the price cap--if Russian oil is forced off the market and they have to shut down oil wells, they may have a problem bringing that idled capacity back online in the future. Wells don't do well just sitting idle, and a large portion of Russian wells are in permafrost--if the oil stops coming up the well any water that comes up with it is likely to freeze, which could damage the well itself, making the shutdown more or less permanent. Russia is already showing signs of inability to bring capacity idled during the pandemic lockdowns back online, and this was before the sanctions and the price cap began starving Russia of oil revenues.
https://newsletter.allfactsmatter.us/p/could-the-oil-price-cap-end-russian
How long this economically distorted way of bringing Russian oil to market can endure is, I think, primarily a function of the price for Brent crude. The higher it goes, the more pressure there will be for Urals crude to exceed the price cap. There was already one closing above the price cap amount so the cap CAN be breached. The awkward questions will all come in when/if Urals crude closes above $60 and stays there. If that happens the EU has to either take steps to force Urals crude off the market altogether, which would push Brent even higher, or abandon the cap.
Either way, there are some large ramifications for global oil markets which come to bear this year.
I'm glad you enjoy my Substack.