Putin says Russia will return to Black Sea grain deal if a string of calls for are met
There are attention-grabbing occasions forward within the tanker market. From December 5, the European Union ban on imports of Russian oil will kick in, with a minor exception for Bulgaria, which has been given longer to provide. And, on Friday, in a transfer meant to limit Russian income on oil exports worldwide, the member international locations of the Price Cap Coalition (principally the G7, the EU and Australia) on Friday agreed to place a value cap of $60/barrel on seaborne crude oil of Russian Federation origin.
On Sunday, the OPEC-plus international locations, which embrace Russia decided to make no cuts in oil production additional to these they introduced again in October. That’s seen as supposed to maintain oil costs steady, no less than for now.
What are the implications of all this? In his newest weekly Tanker Opinion, Erik Broekhuizen of Poten and Partners notes that “currently, Russia is selling its oil well below [the $60 level]. Earlier this week, Urals out of Primorsk were sold below $50/barrel.”
“At the moment, therefore, the implementation of a $60/barrel price cap may have no impact on Russia’s oil revenues,” says Broekhuizen. “It could look like business as usual, with the exception that Russian oil will no longer be sold to EU countries. While Russia has always said that it will not sell to countries that are participating in the price cap, the pragmatic approach for the Kremlin will be to cooperate as long as the price cap is above the market price (for Russian grades). There have been rumors that the Russian stance is changing since they do not want to shut in production.”
Confirmation of the $60 value cap stage got here in statements from the European Council, the G7 and Australia, and from the U.S. Treasury. And an official assertion that Moscow is not going to settle for a value cap got here from Kremlin spokesman Dmitry Peskov
“We are assessing the situation,” he instructed reporters. “Certain preparations for such a cap were made. We won’t accept the price cap and we will inform you how the work will be organized once the assessment is over.”
BAN ON SERVICES
Under the worth cap mechanism, members of the Price Cap Coalition will ban a broad vary of providers—together with maritime insurance coverage and commerce finance—associated to the maritime transport of Russian crude oil except purchasers purchase the oil at or under $60/barrel. Importers who buy Russian oil at or under the worth cap will preserve entry to an array of Coalition-country providers very important to the oil commerce. On February 5, 2023, this ban on providers will lengthen to the maritime transport of Russian-origin petroleum merchandise except the merchandise are bought at or under a value cap to be introduced earlier than February 5, 2023.
HOW THE PRICE CAP WORKS
“The price cap’s operation,” notes the U.S. Department of the Treasury, “is determined by an important factor of the worldwide oil commerce: the maritime providers trade, which incorporates insurance coverage, commerce finance, and different key providers that help the advanced transport of oil across the globe. Traders, brokers, and importers depend on these providers to guard and finance their commerce, and vessel-owners depend on insurance coverage to guard their ships. Moreover, nearly all ports and main canals require ships to hold safety and indemnity insurance coverage. Companies based mostly within the G7 management round 90% of the marketplace for related maritime insurance coverage merchandise and reinsurance. The value cap works by permitting entry to those essential providers from Coalition-country suppliers for Russian oil provided that that oil is bought at or under the cap.
“The value cap works by creating an exception from upcoming restrictions on the usage of maritime providers. We know the established order—the place Russia can commerce freely at ranges close to prevailing market costs, which have been elevated by Russia’s invasion—isn’t acceptable, however we’re additionally dedicated to supporting stability in world vitality markets. The value cap coverage needs to be thought to be a complement to the implementation of forthcoming EU sanctions introduced in June 2022, to encourage steady vitality provides. The value cap is structured as an exception to these restrictions, permitting corporations based mostly in coalition international locations to supply providers associated to the maritime transport of Russian oil commerce provided that the oil is traded at or under $60/barrel.
“This strategy depends on the G7’s dominant function within the maritime providers trade. Once the worth cap is in place, any importer of Russian oil that pays a value above the cap can have to take action utilizing providers completely from corporations outdoors the Coalition—which signify solely a fraction of the market and are sometimes costlier and fewer dependable. The stage of the worth cap, $60/barrel, is ready excessive sufficient to take care of a transparent financial incentive for Russia to proceed promoting oil on world markets. This value is ready at a stage that Russia has traditionally accepted, which is above its price of manufacturing and comparable with costs Russia bought at previous to its conflict in Ukraine.
“Russia has a number of choices to reply to the worth cap. Russia can promote at or under the worth cap and preserve its oil flowing onto world markets, at decrease costs for importers and with the advantage of best-in-class G7 providers. Alternatively, Russia can depend on non-G7 service suppliers, that are restricted in scale, costlier, and fewer dependable. Given these constraints, lowering the amount of gross sales wouldn’t be in Russia’s financial curiosity, particularly as a result of doing so would imply lowering gross sales to key rising markets, together with Russian allies.
“The coalition will review and, if necessary, adjust the price cap based on Coalition objectives and market fundamentals. The coalition will continue to engage with market participants to help ensure updates do not introduce volatility and are practical to implement (including assessing feasible timelines for implementation).”
COMPLIANCE FRAMEWORK
The value cap coverage “safe harbor” for service suppliers requires they that adjust to what Treasury calls “a simple record keeping and attestation process, designed to allow each party in the supply chain of Russian oil shipped via maritime transport to demonstrate or confirm that the Russian oil has been purchased at or below the price cap.”
On November 22, 2022, the Treasury’s Office of Foreign Assets Control (OFAC) issued steering on the U.S. implementation of the worth cap coverage for Russian crude oil. The guidance makes clear, this “safe harbor” for service suppliers via the file retaining and attestation course of is designed to protect such service suppliers from strict legal responsibility for breach of sanctions in instances the place service suppliers inadvertently deal within the buy of Russian oil bought above the worth cap owing to falsified or faulty information offered by those that act in dangerous religion or make materials misrepresentations. The U.S. authorities anticipates working with different members of the coalition to implement the worth cap, together with by sharing info.
WHAT NOW?
“Monday, December 5 will be an interesting day,” writes Erik Broekhuizen. “Tanker brokers and oil analysts alike will preserve a eager eye on the Russian market to see which vessels are loading in Russian ports and the place they’re heading. Will the darkish fleet be as lively as anticipated? Will there be makes an attempt to stick to the worth cap?
“After a few days or weeks, the situation will settle down and it will become clear how and to whom the Russians will export their crude oil. We will also see where the EU will source their crude from. Everything else being equal, both developments will likely lead to more ton-mile demand for tankers in 2023. In addition to more ton-mile demand, we may see more inefficiencies and lower fleet utilization if the dark fleet gains market share in the Russian export market. Newbuilding deliveries in 2023 are also muted, so this will set the stage for a continued strong, but volatile tanker market next year.”
