FBS: Oil’s future after the new sanctions

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Even if you don’t follow global politics, you probably know about the war in Eastern Europe. These events affected various financial assets, especially oil. In this article, FBS analysts explain what is happening with crude prices and how the situation may change in the coming weeks.

Europe fights back

After the Russian invasion of Ukraine and the illegal annexation of the Donetsk, Lugansk, Zaporizhzhia, and Kherson provinces, new international sanctions joined those of 2014 after the annexation of Crimea and the non-implementation of the Minsk agreements.

The sanctions focused on reducing Russia’s income to prevent it from further financing the war through its main source of income, the Oil Industry. The steps taken by the Western nations include banning the export to Russia of any technology, machinery and goods related to energy, transport, aerospace and other industries, preventing the upgrading and modernization of national industries.

A new package of sanctions adopted by the European Council in June and October 2022 comes into effect on December 5. For refined petroleum products, the measures start in February 2023.

What do the new sanctions against Russian oil mean?

As agreed with the G7, the EU now prohibits the purchase, import or transfer of oil and certain petroleum products from Russia and the shipment to third countries of such products originating in or exported from Russia. The exception occurs if the oil or derived products are purchased at or below a pre-established ceiling price.

Additionally, an insurance restriction is included because shipping, insurance, technical or financial assistance companies will not be allowed to provide services to tankers carrying Russian oil unless it is sold below the new price standard.

What is the estimated price limit?

According to analysts’ estimates, the price of the Russian oil standard should settle around $60/b. However, Russia has made it clear that it does not intend to sell at such a price. As a result, the country will have to develop new supply chains as alternatives to the new rules.

What will happen before December 5th?

On October 31, the United States clarified that any cargo of Russian origin loaded before December 5 and discharged before January 19 is not subject to the maximum price. As a result, there will be a margin to maneuver to adapt to the new rules.

What is Europe doing?

Although 90% of Russian oil imports to Europe are carried out by sea, the remaining 10% will have a temporary exception because that oil arrives through the Druzhba pipeline to those EU member states that depend on Russian supply and have no viable alternative options.

Europe has already undertaken a considerable change in its oil trade. The region has diversified its suppliers, preferring European sources so as not to depend too much on any single country. Saudi Arabia, Iraq and other Middle Eastern nations are already sending more and more crude to Europe as their Asian market share has declined due to the influx of cheap oil from Russia.

What awaits oil prices in 2023?

The change in supply chains will provide even more stability and confidence in Europe’s benchmark North Sea crude, Brent. The price may fall if supply exceeds demand, as China could reduce its dependence on the West crude oil

Crude oil

Crude oil is the most popular tradable instrument in the energy sector, offering exposure to global market conditions, geopolitical risk and the economy. The instrument is strategically reliable and located in the global economy. Crude oil has proven to be a unique choice for traders given volatility and the effectiveness of both swing trading and longer term strategies. Despite its popularity, oil is a very complex investment instrument, given the litany of fluctuations in oil prices, risk and impact of policy stemming from OPEC. Short for the Organization of the Petroleum Exporting Countries, OPEC operates as an intergovernmental organization of 13 countries, helping to set up and dictate the global oil market. How to Trade Crude Oil Crude oil is most often traded as an exchange-traded fund (ETF) or through other instruments with exposure to it. This includes energy stocks, the USD/CAD and other investment options. Oil itself is traded through a duality of markets, including the West Texas Intermediate Crude (WTI) and Brent crude oil. Brent has been the more dependent on the index in recent years, while WTI is more heavily traded through futures trading at the time of writing. Aside from geopolitical events or OPEC decisions, oil can move in a variety of different ways. The most basic is through simple supply and demand, which is affected by global production. Increased industrial production, economic prosperity and other factors all play a role in crude prices. By extension, recessions, lockouts or other stifling factors can also affect crude prices. For example, excess supply or softened demand due to the aforementioned factors would result in lower crude prices. This is due to traders selling oil futures or other instruments. If demand increases or production plateaus, traders will bid more and more for crude, thereby driving up prices.

Crude oil is the most popular tradable instrument in the energy sector, offering exposure to global market conditions, geopolitical risk and the economy. The instrument is strategically reliable and located in the global economy. Crude oil has proven to be a unique choice for traders given volatility and the effectiveness of both swing trading and longer term strategies. Despite its popularity, oil is a very complex investment instrument, given the litany of fluctuations in oil prices, risk and impact of policy stemming from OPEC. Short for the Organization of the Petroleum Exporting Countries, OPEC operates as an intergovernmental organization of 13 countries, helping to set up and dictate the global oil market. How to Trade Crude Oil Crude oil is most often traded as an exchange-traded fund (ETF) or through other instruments with exposure to it. This includes energy stocks, the USD/CAD and other investment options. Oil itself is traded through a duality of markets, including the West Texas Intermediate Crude (WTI) and Brent crude oil. Brent has been the more dependent on the index in recent years, while WTI is more heavily traded through futures trading at the time of writing. Aside from geopolitical events or OPEC decisions, oil can move in a variety of different ways. The most basic is through simple supply and demand, which is affected by global production. Increased industrial production, economic prosperity and other factors all play a role in crude prices. By extension, recessions, lockouts or other stifling factors can also affect crude prices. For example, excess supply or softened demand due to the aforementioned factors would result in lower crude prices. This is due to traders selling oil futures or other instruments. If demand increases or production plateaus, traders will bid more and more for crude, thereby driving up prices.
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With this in mind, the International Energy Agency (IEA) expects demand growth to slow to 1.6 million bpd in 2023 from 2.1 million bpd this year.

Brent crude (XBRUSD) consolidated in a demand zone. From this area, FBS analysts expect either a bullish rebound to $96 or a bearish continuation below $87.90 in the near term. The next demand zone is between $82 and $80. Brent may then remain at those lower levels as demand will seek the lowest price option, preventing a repeat of the recent price escalation.

Who will benefit from new sanctions against Russia?

EU and G7 shipowners accounted for 55% of Russia’s Baltic and Black Sea crude exports in September, according to S&P Global data. In addition, shipping insurers in the G7 countries cover around 95% of the global tanker fleet.

Because of the sanctions, Moscow will have to turn to India, China and the Persian Gulf to alleviate the shortage of ships. However, putting together a fleet will take time. As this happens, Russian production may decline limited by available shipping capacity, likely increasing pressure on Russia to sell at a limited price to meet Asian demand.

According to Janet Yellen, US Treasury Secretary, “China and other buyers of Russian oil will now have more leverage to negotiate lower prices.” She further emphasized that “India can continue to buy as much Russian oil as it wants, even at prices above the price cap mechanism imposed by the G7, if it moves away from Western shipping, financial and insurance services bound by the G7 oil cap.”

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