It appears the worst fears of the West have not quite materialized, much to their liking, as the price cap on Russia seems to be working in their favor. Russia’s initial reaction has been discounted by the market, as the Kremlin has not come with an action plan in response to the $60/bbl price. President Putin has responded rubbishing the price cap, calling it all sorts of names, threatening to cut down on production.
But the market is not falling for any of it and continues to view this for what it is – a mere threat. An 11 percent drop in Brent crude price is the sharpest weekly drop since peak Covid. The year-to-date gains have all been wiped out, lower 4 percent from the start of year. This is despite latest data from Opec Plus member countries, showing production cuts have been maintained at promised levels, with near full compliance.
It is too early to say if Moscow is hurting already, but it surely will start feeling the pinch, should prices do not rebound quicker. Agencies have reported Russian Ural crude grades being traded at multiyear lows of $40-50/bbl – even lower than the price cap of $60/bbl. Needless to say, Russian partners in the larger Opec alliance will be keeping a close eye and another decision on production quotas, before the scheduled meeting, cannot be ruled out.
Some of the decline is also to do with China’s slower than expected demand resurgence, as urban centers still struggle to return to pre-lockdown times. The protests have fizzled out, which had been tipped as a key bear run trigger by research houses. For now, the Russian price cap and the lack of action from Kremlin seem to have more weightage than improving situation in China. But this won’t last long, as China (and India) continue to be the driving force of global demand growth.
It would be naïve to think that the Opec Plus group would sit back and watch the oil prices slide. An intervention is very likely, which could be in form of Russia’s standalone decision to lower production or a more collaborated effort from the bloc. Either way, supply side will definitely come into play, if the imbalance continues.
Mind you, the Opec members have long held the view that oil under $80/bbl could be catastrophic in the longer run. Oil infrastructure is believed to be underfunded and under invested, and any sustained run of low oil prices would definitely mean there will be balancing from the big players i.e., Saudi Arabia and Russia. Things are only going to get trickier come February, as the European Union will implement a ban on refined product import from Russia. Expecting Russia to keep playing the waiting game, wouldn’t be wise.
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