Zooming In on the Russian Oil Price Cap

Zooming In on the Russian Oil Price Cap

Freedom Financial Archive | Originally posted Dec 08, 2022
  • The FRAC spread count decreased for seasonal reasons.
  • As the Russian crude cap set in, the Urals’ price increased. Surprise, surprise.
  • There are ways around the cap, which is why it has a low probability of success.

FRAC Spread Count

We’re going to look at the Russian price cap now that it’s officially agreed upon.

What does it mean?

But first we’ll look at the FRAC spread count.

The official FRA spread count number is 290. So, we went from 300 to 290.

Now this may be shocking for those that, that aren’t accustomed to or don’t really appreciate the seasonality of it.

But typically, the six weeks between Thanksgiving and New Year’s Eve, you see a fairly steep decline of activity.

And it can start the last week of November or the first week of December.

And then you start to see a fairly sizable drop off that is going to get us to about 265 or 270 spreads as we get into New Year’s.

Then we usually have a fairly sizable increase as we get into the second and third week of January.

When we look at things that are happening, the slowdowns came in the smaller entities.

But when you look at the Permian and other parts of Texas, things are still fairly firm.

So that’s why the drop’s not going to be too significant.

But when we get much closer to Christmas, you get a sizable drop in the Permian, that can be anywhere between 10 and 15 frac spreads, and then you get a quick snap back right after that.

So, the rate of change is going to be slower just because we’re coming from a much lower number than in previous times. So, the slowdown won’t be as aggressive.

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Russian Price Cap

Now, we have to look at the price cap.

One of the things that we’ve been saying is that Urals are already trading well below the price cap that they’ve been talking about.

They initially discussed $65. Now they, they’ve made an agreement to 60.

Let’s be very clear: nobody who buys ESPO is participating in this price cap.

The Eastern Siberia–Pacific Ocean oil pipeline (ESPO pipeline) is a pipeline system for exporting Russian crude oil to the Asia-Pacific markets (Japan, China and Korea). The pipeline is built and operated by Russian pipeline company Transneft.

So ESPO is trading above the price cap.

It never went below it; it never was going to go below.

That’s because it’s already flowing into Asia – mostly China and India, and some other areas.

It supports our view that diesel and inherent industrial demand will weaken further and put more downside pressure on crude demand.

The OECD Leading Indicators have turned steeper into contraction resulting in more pressure on global trade and underlying demand.There was a lot of handshaking and backslapping among European politicians when they took money away from Russia with this price cap.

But when you look at the price of Urals, it actually rose after this cap was announced from $45.31 to $48.04.

We’re going to see prices go higher and get closer to that cap, because while now you would legitimize buying crude; as in, “I can buy Russian oil and still be under the cap.”

Again, Russia has come out and said, “We’re not going to sell to anyone that participates in the cap.”

They can play whatever games they say they want to play, but Europe didn’t want to stop the flow of Russian crude. Europe did want to hurt their revenue.

The other thing that it introduced is a 45-day grace period for vessels that sea that loaded their cargo before Monday, giving them until Jan 19th to unload the oil, as well as a 90-day transition period for any future change in the price level.

This just makes sure that nobody’s going to get sanctioned. Shippers can’t dump it in the ocean. They can’t just sell it outright. So, it is just a way to protect the ship owners themselves.

Most G7 nations will stop importing Russian crude by the end of the year.

An EU ban on other refined petroleum products originating in Russia is due next February alongside a cap on those goods.

Now, it’s good that they waited until February to do that because they’re still going to need all of their diesel, but that’s going to become another pivot point.

How does this look going forward?

There are also a lot of ways around this price cap from paying Russia from separate banks: one that is in Europe that are beneath the cap and pay the difference through a Middle Eastern or Asian bank.

Again, there’s, there’s things that can be done to circumvent these kinds of loose cap levels.

Speak soon.

All the best,

Freedom Financial News