Oil prices have come off in the last few weeks but limited capacity to increase OPEC production and insurance bans on Russian oil transport will ensure prices remain high over the coming months.
OPEC+ countries, that is, OPEC plus ten countries including Russia, are due to meet next week to discuss increasing production of oil to bring prices under control. This will be interesting because it is unclear how Russia will play this.
Despite the sanctions from the West some OPEC members including Saudi Arabia and the UAE have already said that Russia will remain part of the extended alliance even if the countries don’t agree with its politics. The meeting comes shortly after President Biden’s visit to Saudi Arabia and discussions about high oil prices which are hurting the US economy.At a previous meeting the coalition has agreed to start pumping more oil from August and increase output to pre-pandemic levels. But it doesn’t seem very likely that OPEC+ will be able to ramp up output by much more beyond August – which is something the US has been asking for.
The one exception is Libya. The country has halved its production of oil since April to 600,000 barrels a day and halted exports of oil from key ports at the end of June because of domestic political turmoil. But last week the country lifted the force majeure and loaded its first tankers for export. Its output is now back at 1.1 million barrels a day.
What effect will EU and UK insurance sanctions have on Russian oil later this year?
Since the EU and the UK agreed on a package of sanctions on Russian crude oil in June the flow of oil has been redirected in that a large portion of Russian oil previously imported into Europe is now going to India and China while Europe is importing larger amounts of oil from the US. Correspondingly US oil exports into China and India have declined over the last few months.
But while this had a limited effect on the sum total of oil that makes it into the world markets the next aspect of sanctions which includes maritime insurance and reinsurance and will come into effect at the end of December could have a more profound effect on Russian oil exports. The six-month leeway that is currently in place is possibly creating a false sense that the Russian oil will continue to flow unimpeded.
Oil is currently shipped from Russian ports mostly under Cypriot, Greek and Maltese flags and is being insured largely through Lloyd’s of London. The insurance ban will make it impossible to insure the cargos and will make it very difficult not only to offload ships in Europe but will also make it harder for buyers in India and China to continue trading in the same way.
Also, a large portion of the ships loaded with Russian oil go through European ports and need services provided by EU companies, and the insurance ban will cut off access to those services. While oil is very likely to continue flowing out of Russia, the cost of relevant services will become higher and add to the price of oil.
While there is a real threat that some of the demand for oil will be affected by high inflation in the US and Europe, the fine print of European sanctions will continue to provide support to oil prices over months to come.
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