The European Union again on Friday failed to reach an agreement over a cap on Russian oil prices, with the bloc’s easternmost members, including Poland, Estonia, Latvia and Lithuania, objecting that the proposed price of $60-70 a barrel for Russian crude is too generous and way above the rates that Russia currently sells crude.
European Commission Vice-President Valdis Dombrovskis acknowledged this, saying:If you put the ceiling price too high, it doesn’t really bite. Oil is the biggest source of revenue for the Russian budget, so it’s very important to get it right so that it really impacts Russia’s ability to fund this war,“, he told Bloomberg TV.
Well, they’re right: offering $70 a barrel for the Russian Urals is incredibly generous, given that Bloomberg just reported that China and India are currently getting them for half that price.
According Bloomberg oil strategist Julian Lee, Russia’s flagship Urals crude, was trading at a massive discount of $33.28, or about 40% to international Brent crude, as of the end of last week. In contrast, a year ago, Urals were trading at a much lower $2.85 discount to Brent. Ural is the main blend exported by Russia. The result: Moscow is starting to feel the heat of its war in Ukraine and could lose around $4 billion a month in energy revenue according to Bloomberg calculations.
Washington does not lose sleep over it. “If Russian oil is going to sell at bargain prices and we are happy that India gets that bargain or Africa or China. Its good“, US Treasury Secretary Janet Yellen previously told Reuters.
Maritime nations like Greece are in favor of a higher price cap that will help keep trade flowing. However, the situation could become even murkier for Russia, with EU sanctions on Russian oil due to come into force on December 5, with market disruptions expected. if a price cap is not in place. Meanwhile, Russia is reportedly drafting a presidential decree that prohibit its companies and all traders to sell it to anyone participating in a price cap.
Increase in imports from Russia
Previously, India was never a big buyer of Russian crude when it had to import 80% of its needs. In a typical year, India imports just 2-5% of its crude from Russia, roughly the same proportion as the US before announcing a 100% ban on Russian energy products . Indeed, India only imported 12 million barrels of Russian crude in 2021, with the majority of its oil coming from Iraq, Saudi Arabia, the United Arab Emirates and Nigeria.
But in May there were reports of a “significant increase” in Russian oil deliveries to India.
According to a Bloomberg Report, India spent $5.1 billion on Russian oil, gas and coal in the first three months after the invasion, more than five times the value a year ago. However, China remains the biggest buyer of Russian energy commodities, spending $18.9 billion in the three months to the end of May, nearly double the amount a year earlier.
And it’s all about the money.
According to the International Energy Agency (IEA), Urals crude has been offered at record prices since the start of the war. In the first months after the war began, Ellen Wald, president of Transversal Consulting, told CNBC that a few commodity trading companies — such as glencore and Vitol – offered discounts of $30 and $25 per barrel, respectively, for the Ural blend.
Experts say simple economics is the main reason the White House push to limit crude oil purchases from Russia has fallen on deaf ears in Delhi.
“Today, the Indian government’s motives are economic, not political. India will always seek a deal in its oil import strategy. It’s hard not to take a 20% discount on crude when you import 80 to 85% of your oil, especially in the wake of the pandemic and the slowdown in global growth,Samir N. Kapadia, head of commerce at government relations consultancy Vogel Group, told CNBC via email.
Yet, many readers will not lose sight that India has enjoyed a warm relationship with Russia over the years, with Russia supplying the Asian nation with up to 60% of its military and defense equipment. Russia has also been a key ally on crucial issues such as India’s dispute with China and Pakistan over the territory of Kashmir.
But hey, India and China aren’t the only ones to blame here. Reports have emerged that while Russian pipeline supplies – the bulk of Europe’s gas imports before the Ukraine war – are currently dwindling to a trickle, Europe has been eagerly scooping up Russian LNG.
Europe has worked hard to wean itself off Russian energy raw materials since the latter invaded Ukraine. The European Union has banned Russian coal and plans to block most Russian oil imports by the end of 2022 in a bid to deprive Moscow of an important source of revenue to wage its war in Ukraine.
But giving up Russian gas is proving more expensive than Europe would have hoped. As Russian pipeline gas supplies – the bulk of Europe’s pre-war gas imports from Ukraine – dwindle to a trickle, Europe has eagerly scooped up Russian LNG. The Wall Street Journal reported that imports from the Russian liquefied natural gas bloc jumped 41% year-on-year in the year to August.
“Russian LNG has been the dark horse of the sanctions regime,Maria Shagina, a researcher at the London-based International Institute for Strategic Studies, told the WSJ. Importers of Russian LNG to Europe have argued that the shipments are not covered by current EU sanctions and that the he purchase of LNG from Russia and other suppliers has helped control European energy prices.
By Alex Kimani for Oilprice.com
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