Energy Prospectus

Raymond James Energy Stat: Price Cap on Russian Oil Is Unwelcome News for Moscow, but It Will Take Time to Gauge the Supply Impact
Full Report here: <https://raymondjames.bluematrix.com/lin ... 371a08fc42>

This is our fifth Stat of the Week of 2022 pertaining to the Russian oil industry, and we have also had five Stats about the European natural gas crisis (most recently in October) – all of this, of course, in the overarching context of the war in Ukraine. Today, our focus is on the new price cap on Russian oil, finalized by the European Union and the G7 major economies on December 2. This report is a collaboration with Raymond James’ Washington Policy analysts, who have been also covering this aspect of the story.

As with everything surrounding the war, there are both economic and geopolitical dimensions to consider. For the oil market’s supply/demand fundamentals, it is premature to judge the impact – there is no historical precedent to which we can point, because nothing quite like this has ever been done before – but, in any case, we continue to expect gradual deterioration in the Russian oil industry and thus a downward production trend.

From a geopolitical perspective, this policy, as with all sanctions, will not single-handedly end the war or transform Moscow’s strategic thinking – but it will play a role in reducing the Kremlin’s access to cash and weakening the capacity to continue the war.

Most important points

RAYMOND JAMES: What will be the price cap’s financial impact on the Russian oil industry?

As noted earlier, the price cap is meaningful provided that Brent is in the mid-$80s or higher. For context, we are forecasting that Brent will average $105/Bbl in 2023. Thus, Russia would lose out on the hypothetical “surplus” of $20/Bbl. Extrapolating from the current crude export figure of 5 million bpd, the economic loss amounts to $100 million per day, or $37 billion over a 12-month period. This is needle-moving, though not quite a game-changer, for an economy whose GDP in 2021 was $1.5 trillion on a nominal basis. What makes the total economic hit heftier is that, even without the price cap, Urals is already being sold at a wide discount to Brent, as we discussed earlier.

In and of itself, the price cap won’t prevent Russia from exporting – but production is still set to decline over time.

In the almost ten months since the war started, it is fair to say that Russian oil production has been more resilient than we had initially thought. As shown below, there was an abrupt falloff in 2Q versus 1Q, but it bounced back in 3Q. We anticipate that the impact on production and exports will escalate over time, ending 2023 more than 1.0 million bpd below pre-war levels.
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MY TAKE: If the price-cap does take a million bpd of Russian oil off the global market, it will offset almost all known production increases expected to occur in the world. IEA's forecast is that global demand for oil will increase by 1.6 million bpd in 2023 and another 2.2 million bpd in 2024. This means the global oil market is going to be under-supplied and "rationing of refined products by price" will be necessary. OECD petroleum inventories are already below 27 Days of Consumption and clearly heading to 25 Days of Consumption by 2H 2023. OECD petroleum inventories have NEVER BEEN THAT LOW.