Russian oil is stable, but the future price cap and embargo from EU create risks

RUSSIA ENERGY / FINANCE - In Brief 21 Oct 2022 by Marcel Salikhov

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The Russian oil sector was pretty much stable in September. Crude production increased 1.5% m-o-m to 10.8 mbd (including gas condensate) but was still below February levels (11.1 mbd) by 2.7%. Primary refining was stable in September at 5.6 mbd despite the seasonal reduction in domestic demand for motor fuels as well as falling payments on the damper mechanism for gasoline. Chart 1. Russian oil production and primary refining, 2019-2022 Source: Rosstat, CDU TEK, IEF estimates  Seaborne exports from Russia have continued to fluctuate in the range of 2.9-3.1 mbd from mid-July to October.  Seaborne exports to Europe amounted to 0.63 mbd compared to 1.62 mbd in February. Thus Russian companies have managed to redirect up to 1 mbd to other markets. On October 6, the EU published the 8th package of anti-Russian sanctions which includes a legislative mechanism for setting a price cap as part of the previous G7 decision. At the same time, there is still uncertainty about the main parameters of this mechanism, including the possible value of the actual level of the “price cap” and the countries implementing the cap. US Treasury Secretary Janet Yellen's proposed to set a "price cap" at $60/bbl but it's still just a proposal. If the price ceiling just slightly differs from the current price of Urals (~$70/barrel), then India and China will not benefit from joining the coalition, since there is almost no financial gain, and the risks of losing some Russian supplies are high. On the other hand, if a more aggressive price ceiling (like $40/bbl) is set,  then there are increased risks that Russia will actually “zero out” exports to the “price cap Coalition” countries in order to shak...