Russian Price Cap and Recent Cargo Flows
Aug. 25, 2023
The Russian price cap has always had two objectives: reducing Russia's revenues from oil exports and ensuring that oil continues to flow to global markets. If Western maritime services are used, attestations must be kept showing Russian oil was bought under US $60. In July, Russia’s leading Urals-grade crude began trading at above $60 a barrel—above the cap the Group of Seven economies set for Russian oil last December to allow Russia to continue selling and keep global prices low while still choking off revenue to Moscow. Analysis suggests that a large portion of its exports are being shipped and sold on at higher prices. One important factor to watch in 2H 2023 will be pressure on the Russian ruble as this could impinge Russia’s ability to continue scaling back its exports.
We note the growing number of Russian barrels headed for discharge in the Middle East (orange shade in Figure 1). In the first six months of the year, crude and dirty cargoes discharged to the Middle Eastern region averaged 1.9 million MT/month, marking a 28% increase over the 6-month period preceding the price cap implementation. Russian imports serve as an alternative to OPEC+ production from Middle Eastern countries. One of the main use cases for discounted Russian crude and fuel oil is feedstock for power generation. Middle Eastern traders have also opted to store, trade, and re-export Russian supply, a trend we expect to continue so long as there is an attractive discount for Russian barrels relative to global benchmarks.
Despite the economic incentive, access to tonnage is becoming a concern. To this effect, in July, we observed a notable decline in dirty Russian marine exports (Figure 1), reasonably concluding this is a result of Russian barrels trading above the specified US $60 cap. This technically precludes Western firms from providing shipping, insurance, and marine services while also making the attractiveness of importing Russian barrels less attractive as their discount to other options narrows. As such, Russian flows will likely remain lower than what we observed over the last six months. In turn, conventional tonnage will reposition to “normal” trades, increasing the likelihood of a somewhat mild winter market for crude tankers.
Figure 1: Russian Marine Exports
Source: McQuilling Services, AIS Vessel Tracking
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