Oil price ceiling: homeopathy or surgery?

5 December 2022, 12:02 PM
It is not yet clear how Russia will react to the implementation of a price cap on its oil. (Photo:energyintel.com)

It is not yet clear how Russia will react to the implementation of a price cap on its oil. (Photo:energyintel.com)

The past week in the markets was very passive and short, thanks to the Thanksgiving holiday celebrated in the U.S. on Thursday. This made the trading week short and the weekend long. Moreover, after the pandemic, investors and speculators take more reckless breaks, which has removed all activity and liquidity from the market since Wednesday. At the same time, sentiment remains upbeat. Markets continue to speculate that the Fed will be soft and pliable and stop actively raising rates. As a result, the S&P 500 added 80 points over the week and came into Friday at 4,027 points. The dollar continues to weaken, which has translated into both the strengthening of the euro and the re-emergence of the British pound, which, with Rishi Sunak, has already managed to win back half of the losses stemming from Liz Truss and her tax reform.

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Interesting things are happening in the oil market. So far, oil is doing well, as we like, and will open Friday morning at $85 a barrel for the Brent benchmark. It has fallen far below the $100 per barrel desired by the sheikhs. Black gold is worrying first and foremost about the Chinese economy. That’s along with the global economy, which according to the tea leaves being read by the world’s leading economists is facing a “non-re-cession recession." Since few people trust Chinese statistics, investors are digging deep into secondary signs that the party of the great helmsman Ximay not distort. For example, this week, economists noticed that very few people are going into the Beijing subway. Those levels are where they were in mid-2020, when the whole world, and not just comrades from China, was sitting at home. This means that the restrictions have not been very strongly pulled back.

And the second question puzzling the oil market is what will happen in two weeks with Russian oil. In truth, this situation will be an excellent model for a whole course in game theory, and will be fodder for many books from smart professors. The EU is now bidding on what the price ceiling on Russian oil should be. Everything is logical here. Countries like Greece and Malta with lots of oil tankers want a ceiling of $70 dollars to be a “homeopathic remedy” without actually affecting sales, because even now Russia sells oil at this price or even cheaper. Russia's neighbors, such as Poland and the Baltic states, want to inflict as much pain on Moscow as possible and insist on a lower ceiling. So long as the trade continues.

At the same time, it is not clear how Russia will behave. After all, Putin and Co. long ago vowed that they would not tolerate ceilings and would not supply oil to countries that support these ceilings. This, of course, begs the question of what “support” means. If an oil shipment which is insured by a country within the price ceiling scheme flows to India, but India itself hasn’t introduced a price ceiling, will this qualify? And Putin, while trading in the EU is still going on, is frightening everyone he can that the ceiling will be a mistake that will cost the oil market dearly, as he tries to influence this ceiling or even break the consensus on its introduction. But whether he will make a suicidal somersault similar to gas in the oil market– namely, whether he will limit supplies after the imposition of sanctions to everyone around – remains a mystery. It will all come from Russia. They love to cut off their nose to spite their face.

In the gas market, for example, Russia looks like it will soon stop transit through Ukraine as well. Gas prices have already reacted to these plans by Gazprom, which has not announced them yet, but which is conducting preparatory work. This will add energy problems to Ukraine, where there is a rather literal Black Friday this week – which in addition is so foggy that you could film Silent Hill in Kyiv. Against this background, authorities are revising economic projections for 2022 and even 2023, because the winter will be long. Now GDP is expected to fall by 32% in 2022, and to continue falling in 2023, as well. But there is huge potential for growth in 2024, because the comparison base will be so low. Markets, however, are not reacting to this. The hryvnia remains the last bastion of stability in this unstable world. And this week, its market rate only strengthened by 5 kopecks, stopping close to the mark of 40.3 hryvnia per dollar.

On the domestic bond market, some recovery is noticeable against the backdrop of the introduction of government bonds at 23-25%, which interrupts potential devaluation. And Ukrainian Eurobonds have continued their very slow growth, with investors ignoring Russian missile strikes, buying lottery tickets, and betting on a Ukrainian victory. So far, this is being done by crazy investors who are risk-inclined. The big reliable funds are waiting. At the same time, there has been some movement among the big players who want to participate in Ukraine’s economic growth after the war. Virtual talks about a potential Investment Fund in Ukraine that were conducted with BlackRock suddenly resulted in the news that an Australian billionaire is ready to invest $500 million of his own. It seems that he will not be the last to be ready to give money under the honest and reputable name of BlackRock.

P.S. Do not wait; the time will never be 'just right.' Start where you stand, and work with whatever tools you may have at your command, and better tools will be found as you go along.

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George Herbert

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