Oil markets entering a new era of chaos

The UK and other parts of Europe may be in for a cold and chilly winter

Rashid Husain SyedDecember 5 is fast approaching. On the day, and despite the tightness in the markets resulting from the OPEC output cut, major moves are at play on the global energy chess board.

That is the day the EU is set to ban crude imports from Russia in an attempt to deplete Russia’s war chest. The ban will force Russia out of its primary market – Europe – causing it to seek alternative outlets to sell its oil.

The EU also aims to ban Russian oil products starting Feb. 5.

But to avoid any shortage of crude in the global markets or a spike in crude market prices, the G7 has agreed to allow Russia to continue selling its crude to world markets, but at a price to be set by them, which will be below global crude market prices.

To further reduce the flow of petrodollars into the Russian kitty, the EU and UK are also set to prohibit shipping companies from providing shipping, financing and insurance for tankers carrying Russian oil unless the shipments are priced below a cap. Most tankers are registered in the UK, and most insurance companies operate out of the UK and the EU. For the shipping lines to ignore this new set of rules would be very difficult.

The ban will lead to major readjustments in crude markets, with its consequences on the energy world still unknown.

The European Union, however, says it is “ready to go” with its price cap on Russian oil, according to Ursula von der Leyen, President of the European Commission. “We have set all the tools necessary in place in the European Union,” von der Leyen told Bloomberg Television. “It is important not only to dry out the war chest of Russia but also very important for many vulnerable countries to have an acceptable level of prices.”

U.S. Treasury Secretary Janet Yellen is believed to be the brain behind the ban, telling the media that she remains hopeful that it will force Russia to offer part of its crude at a price set by the U.S. and its allies if Moscow wishes to prevent a shut-in of some supplies.

“They’re going to be looking for buyers, and we think they’re going to have a hard time selling all of it,” Yellen said in an interview with Bloomberg News. “Our estimation is there would be some shut-in on Dec. 5 unless they’re willing to accept a price at or below the cap for buyers around the world.”

But not everyone agrees. Russian officials, including President Vladimir Putin, have said Moscow would refuse to sell oil to countries participating in the price cap.

Many oil traders also believe Russia will be able to unload all its oil without European and UK shipping services. Diversion of Russia’s crude exports to Asia has been gathering speed, with record volumes heading on tankers to the region’s ports, according to Julian Lee, oil strategist for Bloomberg First Word.

Two-thirds of Russia’s crude is loaded onto tankers at Russian ports and is now heading to Asia. That compares with less than two-fifths in the weeks before Putin invaded Ukraine in February, Lee added. According to Lee, China and India are the primary beneficiaries of the trade, with minor volumes heading to places like Sri Lanka and the United Arab Emirates.

The International Energy Agency said last week that the move to deprive Moscow of revenue would create more uncertainty for oil markets and add pressure on prices, including diesel.

But while Washington plans to issue guidance on the Russian oil price cap in the coming days, a U.S. State Department official conceded last week that there would probably be some “hiccups” in its implementation.

Germany, which relies heavily on Russian energy supplies, can’t rule out temporary supply bottlenecks and price increases once the ban is in place on Dec. 5, according to its Economy Ministry.

Due to the lack of alternatives to Russian supplies, its dominant supplier, energy supplies are a significant cause of concern to Europe. Prices are rising.

Many analysts assert that the UK and parts of Europe are in for a cold and chilly winter, with surging energy prices during winter extracting a political price from European and UK governments.

The ‘unprecedented’ price cap is bound to create a new set of variables in the global energy equation leading to long-term geopolitical impacts. Politics continues to play with the fundamentals of oil markets. This does not bode well for the future of the energy markets.

We are entering into a new era of uncertainty and chaos.

Toronto-based Rashid Husain Syed is a respected energy and political analyst. Energy and the Middle East are his areas of focus. Besides writing regularly for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.

For interview requests, click here.


The opinions expressed by our columnists and contributors are theirs alone and do not inherently or expressly reflect the views of our publication.

© Troy Media
Troy Media is an editorial content provider to media outlets and its own hosted community news outlets across Canada.

You must be logged in to post a comment Login