Price Cap Trap. The Energy Report 04/19/2023

They are caught in a trap, and they can’t get out! Global economic leaders are probably embarrassed by trying to support a price cap on Russian oil that they knew or should have known, would never work. While the Biden administration threatens those who violate the price cap, the reality is that Russia is selling more oil with the price cap in place than they were before the invasion of Ukraine.

 

The Middle East, China and India are buying record amounts of Russian crude oil and in Europe and the US, they are knowingly buying laundered Russian oil that is feeding the Russian war machine. Reports show that China, Turkey, the UAE, Singapore, India, Saudi Arabia and other countries have feasted on Russian crude oil. Now some of those countries have refined that oil and they’re selling it back to the EU, Australia and other G7 nations in product form. So, while not buying Russian oil directly, they are buying derivatives of Russian oil every day.

 

Forbes says that countries are laundering Russian oil. They quote the Centre for Research on Energy and Clean Air (CREA ) says that China, India, the United Arab Emirates, Turkey, and Singapore as “laundromat countries” that increased imports of Russian oil after the Ukraine invasion. They also increased exports of refined products to the “price-cap countries” that sanctioned Russian oil, including the European Union, Australia, Japan, the United Kingdom, Canada, and the United States. In the year following Russia’s invasion of Ukraine, the five laundering countries increased seaborne imports of Russian crude oil by 140% over the previous year, according to CREA. They are absorbing 70% of Russia’s crude oil exports. The Russian oil finds its way into the price-cap countries as diesel, jet fuel and gasoil.

 

This is what happens when you have global leaders that have an agenda that seems to be divorced from reality. When you look at the war in Ukraine, there is no doubt that energy was a major undertone or the reasons and the execution of the war. Russian energy dominance as well as the European transition off fossil fuels left the entire continent vulnerable and now Europe is paying the price.

 

Today Reuters is reporting that, “India and China have snapped up most Russian oil so far in April at prices above the Western price cap of $60 per barrel, according to traders and Reuters calculations. That means the Kremlin is enjoying stronger revenues despite the West’s attempts to curb funds for Russia’s military operations in Ukraine. A G7 source told Reuters on Monday the Western price cap would remain unchanged for now, despite pressure from some European Union countries, such as Poland, to lower the cap to increase pressure on Moscow.” Yet Poland’s desire to lower the cap to increase pressure on Moscow won’t work if everyone on the globe basically continues to buy Russian oil. On the flip side of that, if everybody complied and refused to buy Russian oil above the price cap, then the world would be faced with shortages.

 

The oil market this morning doesn’t seem to be concerned about shortages even though we saw very bullish American Petroleum Institute Report (API). The API showed a trifecta of supply drawdowns and strong demand leading to crude falling by 2.675 million barrels. We also saw gasoline inventories fall by 1.0 million barrels and distill inventories by 1.9 million barrels.

 

We are also seeing signs that global oil demand has increased significantly with the Chinese reopening and more signs that OPEC is following through with production cuts. Chinese refinery runs hit a record high. Chinese refinery throughput surged to record highs in March 2023 as reported yesterday. Refinery throughput rates in China rose to a record high of 63.29 mn tonnes (or ~14.9 mbpd) in March 2023, reflecting recovery in domestic demand, as the nation reopened its borders earlier this year.

 

There are concerns on the economy the oil market seems to take solace in the fact that Iraqi oil exports may resume even though questions remain. It was reported that Kurdistan Region’s oil exports will resume this week as only technicalities remain to implement an agreement between Erbil and Baghdad, Iraq’s Prime Minister Mohamed Shia al-Sudani said on Monday.

 

In the US green energy groups are going to continue to squeeze American consumers, driving up the cost of oil. The EPA said it’s going to tighten up its pollution regulations for oil and gas facilities after being sued by people like the Sierra Club California communities against toxins and the coalition for a safe environment. Regulations of course will further reduce strained refining capacity and drive-up prices and it’s only a matter of time before the same groups start to sue the EPA for the environmental impact of electric cars.

 

Interest rate concerns are weighing on oil a bit but use weakness to get hedged. The supply squeeze is coming.

 

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Phil Flynn

The PRICE Futures Group

Senior Market Analyst & Author of The Energy Report

Contributor to FOX Business Network

 

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