“Up to $150 and above”: how the attempts of the G7 countries to limit the supply of Russian oil may affect the cost of raw materials

On Wednesday, August 3, the countries participating in the OPEC+ agreement approved new parameters for oil production.

As a result of the negotiations, it was decided to increase the production of raw materials by a total of 100,000 barrels per day from September.

As Deputy Prime Minister of Russia Alexander Novak said after the meeting, now demand and supply in the global oil market have already returned to pre-pandemic levels in March-April 2020.

At the same time, additional production volumes will make it possible to satisfy the growing consumption of fuel in the world, the Deputy Prime Minister added.

According to him, to date, international air traffic has grown by 23% compared to April 2020.

At the same time, business activity is growing, and there is a high demand for energy resources in China.

At the same time, OPEC+ countries still have concerns about the future prospects of the oil market.

“There are uncertainties that need to be taken into account ... These are, first of all, the increasing cases of COVID-19, the spread of a new strain.

We see uncertainties related to the disruption of transport and logistics chains due to restrictions being introduced, including on Russian oil and oil products.

This also leaves an imprint on the balance sheet and pricing,” Novak said on the air of the Rossiya 24 TV channel.

• Deputy Prime Minister of the Russian Federation Alexander Novak

• globallookpress.com

• © Maxim Konstantinov

Recall that back in early March, the United States introduced a complete ban on the import of energy resources from Russia, and the UK announced plans to stop buying oil from Moscow before the end of the year.

Later, the EU countries also decided to abandon Russian raw materials, but the embargo should be fully operational only by the beginning of December and will apply only to sea deliveries, and not to pipeline ones.

However, even against the backdrop of the announced sanctions, Russia continues to receive a high amount of income from the sale of energy resources, as reported in mid-July by the International Monetary Fund.

Many European countries today are trying to stock up on Russian oil before the embargo is introduced and therefore are actively increasing their purchases of raw materials.

At the same time, Moscow has begun diverting hydrocarbon exports to friendly countries and has already become the largest supplier to India and China.

Under these conditions, the G7 countries (USA, UK, Germany, France, Italy, Canada and Japan) thought about creating a so-called oil consumer cartel to set a price ceiling for raw materials from Russia.

Thus, the parties want to limit Moscow's profit from the export of raw materials.

“We will seek to develop solutions that will reduce Russia’s hydrocarbon revenues… We remain committed to considering a range of approaches, including options for a comprehensive ban on all services that allow Russian offshore crude oil and petroleum products to be transported around the world, unless the oil is purchased at or below the price to be agreed with international partners,” the G7 said in a statement on the British Cabinet website.

It is assumed that the price ceiling could be introduced in early December, when the European embargo comes into force.

However, the initiative of Western countries still raises many questions, Igor Galaktionov, an expert on the stock market at BCS World of Investments, noted in a conversation with RT.

“The main question is whether India and China will join the G7 plan.

Without them, such a measure is unlikely to be implemented.

In addition, it is not yet entirely clear what reciprocal steps Russia can take.

If the country completely refuses to sell its oil at the proposed prices, then the cost of raw materials from other suppliers may set new records,” Galaktionov explained.

A similar point of view is shared by Natalia Milchakova, a leading analyst at Freedom Finance Global.

In her opinion, even if a cartel of oil buyers is created, such an alliance will not last long.

As the specialist explained, it is easier for each specific consumer to negotiate a preferential price directly with the supplier instead of colluding with other importers and imposing restrictions on themselves.

• Tanks for storage of oil products on the territory of the Taman Bulk Cargo Terminal

• RIA News

• © Vitaliy Timkiv

At the same time, India and China are already buying oil from Moscow at a significant discount.

In July, the cost of raw materials of the benchmark Brent brand on the world market averaged $108.92 per barrel, while Russian Urals was sold at $78.41 per barrel.

Such data are provided in the materials of the World Bank and the Ministry of Finance of the Russian Federation.

“China, India and other major consumers of Russian oil outside the G7 and the West have already been skeptical about the proposal for a price ceiling.

Everyone understands that the result of such experiments could indeed be Russia's complete refusal to supply oil to the G7 countries and those states that will follow the West's lead.

In this case, the cost of a barrel on the world market may well rise to $150 or more,” Milchakova did not rule out.

A market without alternatives

The rise in oil prices over the past six months has already led to a sharp increase in the cost of fuel and a record acceleration of inflation in the United States.

According to the US Department of Labor, in June 2022, the growth rate of consumer prices for goods and services in the United States reached 9.1% in annual terms.

The value was the highest since November 1981.

According to Natalia Milchakova, for several years the United States has been reducing investments in oil production, so now they cannot quickly increase production and compensate for the lack of Russian raw materials.

Washington is counting on the fact that the countries of the Middle East will be able to seriously increase their own production and thereby replace oil from Russia.

However, experts doubt the implementation of such a scenario.

“The administration of President Joe Biden has made great efforts to encourage the OPEC cartel and, in particular, Saudi Arabia to increase oil production.

However, Riyadh, apparently, will not increase the production of raw materials at the expense of Russia, which has come under pressure from sanctions, ”said Alexander Potavin, an analyst at FG Finam, to RT.

• US President Joe Biden

• AP

• © Jim Watson/Pool

OPEC itself has previously repeatedly stressed that there are no free capacities in the world today to replace Russian raw materials.

Against this background, even if the G7 countries fail to agree on a price ceiling, the price of oil on the world market will continue to remain close to $100 per barrel.

“In August, we expect prices to fluctuate between $98-113 per barrel.

This is our base scenario, but it is possible that if the market is affected by non-market events (for example, natural and climatic factors or geopolitics), prices may go beyond this corridor.

And in which direction it will depend on the nature of external changes, ”Milchakova suggested.

In turn, Alfa Capital analyst Alexander Dzhioev noted that in the near future the cost of oil is likely to remain high, which will play in favor of the Russian budget.

“If we talk about the filling of the treasury, then several factors affect financial flows at once: the price of Urals oil, the ruble exchange rate and the volume of raw materials production.

High oil prices imply an increase in financial revenues to the budget, which neutralizes the negative while reducing production and strengthening the ruble, ”the source added RT.