The EU has placed an embargo on Russian oil. What does this mean and how will it affect the energy market EU, G7 and Australian oil sanctions against Russia come into effect 05.12.2022, 12:18

On December 5, the EU embargo on Russian oil transported by tankers comes into effect, and the ceiling price for the marine supply of this energy carrier begins to work.

Regarding the import of oil into the EU, it is still possible:

▪️ Buy Russian oil supplied through the pipeline until the EU Council decides to ban such supplies;
▪️Get oil if it’s shipping from or passing through Russia but also not Russian.

At the same time, Germany and Poland have previously stated that they will refuse to buy pipeline oil (raw material is supplied from the northern branch of the Druzhba oil pipeline). However, according to Kommersant, Warsaw has already requested 3 million tons of oil for 2023 and this oil must be pumped through Druzhba.

Hungary, the Czech Republic and Slovakia also receive Russian oil via the pipeline (fuel passes through Ukraine in the southern branch of the Druzhba).

Officially, the demand to continue oil imports was voiced only by Hungary. Bulgaria, which is an exception, will be able to purchase Russian oil and petroleum products by sea until the end of 2024, while Croatia will be able to purchase kerosene until the end of 2023. Until December 5, 2023, the sale of petroleum products derived from oil transported by pipeline to the Czech Republic is permitted.

The supplied oil cannot be transferred to a third country, even within the European Union. All shipments and containers of such crude oil will need to be marked “REBCO: Export Prohibited”.

According to the regulation issued by the EU, Russian oil transported mixed with oil of other origin is subject to a ban. However, if the share of non-Russian oil is determined in this mix, this share will not be subject to sanctions. If the exact share cannot be determined, the entire consignment will not be allowed to be unloaded in the EU.

EU sanctions also imply a ban on European tanker insurance or other financial and intermediary assistance from Russia to third countries for oil supplies. From February 5, 2023, the EU plans to ban the purchase of petroleum products.

What does the price cap mean?

Under the ceiling price, companies from countries that have agreed on sanctions cannot provide brokerage, shipping, insurance and other services for the sea transport of Russian oil to third countries. All this is possible only if the fuel is sold at a price not exceeding $60 per barrel.

The restrictions have been endorsed by the “big seven” countries (the G7 includes the UK, Germany, France, Italy, USA, Canada and Japan), as well as the European Union and Australian countries. These countries control most of the shipping companies and insurance companies in the world.

The introduction of a ceiling price is, in effect, a softening of the original EU plan to completely ban financing and insurance of the Russian oil supply. According to Ursula von der Leyen, head of the European Commission, the ceiling would allow “to significantly reduce Russia’s revenues and stabilize world energy prices”.

Countries that have decided on the price ceiling have pledged to ban their operators for 90 days from providing insurance, financing and services to third-country vessels carrying Russian oil deliberately above the ceiling price. If a European ship violates the price ceiling, it is promised that it will be penalized under EU law.

The US Treasury pointed out that the oil price ceiling is high enough to leave Russia with an economic incentive to continue fueling world markets.

Russian Ural oil is currently trading below the ceiling price. It retails for around $50 a barrel, according to the Argus agency. According to the Ministry of Finance, the average barrel price of the Urals in the January-November period was $78.32, and in November it was $66.47.

In addition, oil prices have been capped by countries that have already reduced consumption or abandoned Russian oil altogether. The success of these restrictions will depend on how the main buyers of Russian oil – China and India, which currently account for two-thirds of Russian exports – behave. They did not officially support this measure.

what did russia say

The Kremlin refused to accept a ceiling on Russian oil. According to Dmitry Peskov, press secretary of the President of the Russian Federation, “preparations have already been made” for this decision.

In response, Deputy Prime Minister Alexander Novak announced that mechanisms have been developed to respond to price ceilings. According to him, Moscow is even ready to reduce the extraction of the resource if necessary. The Minister pointed out that such restrictions amount to intervention in market instruments and that Russia is ready to cooperate with consumers who will work only in market conditions.

National Energy Agency believes, because of the price ceiling and the EU oil embargo, Russia will have to reduce production – first by 1.4 million barrels per day, and by the end of March 2023 – by two million (from the level of production before the start of 2023). military operation). Then, on average, in 2023 Russia will produce 9.6 million barrels per day (now – 10.7 million). This is a return to production levels of the late 2000s.

At the same time, the newspaper Vedomosti, referring to the data of the Ministry of Finance of Russia, writes: The minimum acceptable price for the Russian budget is the Urals at $ 50 per barrel.. However, such a value is generally only acceptable at a maximum production condition of 11 million barrels per day.

How will the oil market react?

Before the start of the military operation in Ukraine, EU countries accounted for about 85% of the offshore oil supply from the Russian Federation. Overall, according to data from the Federal Customs Service, in 2021 crude oil and oil products accounted for 37% of Russia’s total revenue from exports of goods. Exports are now diverted to other markets and the biggest buyers are India and China.

According to the International Energy Agency, by October 2022, EU countries have reduced Russian oil imports by 1.1 million barrels per day to 1.4 million barrels per day, and there will be a reduction in supply after the embargo goes into effect. another 1.1 million barrels per day.

According to experts, a sharp rise in oil prices can be expected if the supply of Russian oil is interrupted with the help of European transport and insurance companies. Kirill Melnikov, head of the Center for Energy Development, said it could exceed $100 per barrel. OPEC+ countries did not change their oil production plans after the December 4 meeting. Against the background of the EU oil embargo, experts interviewed by The New York Times OPEC+ will take a wait-and-see stance due to uncertainty. At the same time, the group countries are ready to cut production if necessary to support prices.

The decision to impose a ceiling price on Russian oil, adopted by the European Union countries, G7 countries and Australia, entered into force on 5 December. The ceiling price has been set at $60 per barrel and will be reviewed regularly after January 15. The restrictions will affect a wide range of services related to the transportation of oil by sea. The Kremlin refused to accept the decision of the Western countries. On December 5, the EU embargo on the offshore supply of Russian oil also begins to work.



Source: Gazeta

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