Russian Oil Price At Key Port About To Breach Sanctions Cap, Would Lead To Sharp Drop In Supply

The reason why oil traded above $100 for much of 2022, is due to fears that it would be effectively withdrawn from global markets as a result of Western sanctions, slashing global oil supply by millions of barrels every day. While that did not pan out in the past year, with every passing day we are getting closer to testing the resolve of western leaders to make sales of Russian oil above $60 illegal.

As Bloomberg reports, at a time when Russian oil exports are finally starting to decline, the price of Russian oil at one of its Western ports is the closest to the price cap set by Group of Seven nations since the measures came into effect late last year.

Urals crude at the port of Novorossiysk in the Black Sea rose to $59.98 on Tuesday, according to data from Argus Media (the pricing agency’s assessments are important in determining future caps). Argus’s figures are central to the price cap. Urals at the Baltic Sea port of Primorsk also gained, rallying to $59.38, the Argus data show.

The primary reason for the rising price – and lower Russian seaborne exports – was significantly reduced shipments from Russia’s western ports, as discussed yesterday.

Since the sanctions came into effect, oil from Russia’s has largely traded above the price cap — which prevents access to Western services including insurance — but prices in the West, which serves non-Asian markets, have yet to hit that level, Argus data show. That in part reflects a huge gap between the price at the ports of loading and delivery, almost all of which goes to middlemen.

US officials have long argued that the price cap is there to give buyers leverage while ensuring that, if Russia can’t transport its own barrels, there is no consequent oil supply shock. But a breaching of $60 for Urals would nonetheless suggest Russia’s ability to get its barrels delivered independently is growing.

Should the price of oil keep rising higher, and with Brent now above $80 and approaching YTD highs with OPEC+ supply cuts finally starting to bite…

… a big chunk of Russian oil that was formerly available for purchase to western nations is about to become non grata, leading to another violent repricing of global energy markets and leading to a price spike, one which comes at the worst possible time: just as the market is convinced the Fed is doing hiking. Only, a few more weeks of oil above $80 and headline inflation is about to head back over 5% in no time.

If Russia’s top export grade surpasses the $60 threshold, Bloomberg notes that it would allow Moscow to claim a win of sorts by showing Russia can get its barrels to buyers around the world without help from western firms. The price cap allows Russian oil to be transported with western ships and insurance only if it’s priced below the threshold.

But a vast shadow fleet of (mostly Indian and Greek) tankers has emerged since sanctions ratcheted up last year, helping to haul the nation’s oil and work around the cap. Yet in a potential twist, yesterday Bloomberg reported that the fleet of tankers that sprouted up out of nowhere to keep Russia’s oil moving has disbanded even faster than it emerged:

The “shadow fleet” of tankers, which was created to ensure the transportation of Russian oil, has shrunk tenfold.

Mumbai-based Gatik Ship Management now marshals a fleet of just four oil tankers, according to Equasis, an international maritime database set up to promote safe shipping. As recently as April it had 42, having amassed most of those carriers in under a year.

This development which would make delivering illicit Russian oil which traded above the price cap, much more difficult.