A higher global oil price will help Russia pay for its war
The Economist reported an article that can be read in 4 minutes on September 7th, 2023 at 12:19 PM Indian Standard Time.
The time of plentiful crude oil exports in Russia was not indefinite. Even though they surpassed past records in the past few months, there are fewer resources to extract in the country and there are dangers to voyaging through the Black Sea. Consequently, the amount of crude oil being shipped has decreased to 3 million barrels per day in August. This is 800,000 fewer barrels per day than the April-May average and lower than pre-war levels. It's unlikely the amount of crude oil shipped will recover. On September 5th, Russia stated that they would continue a "voluntary" 300,000 barrel per day decrease starting from August until the end of 2023. However, it's unclear what was the first reduction from.
The Kremlin is facing a shortage of funds for its military due to a decline in exports. There has been a significant drop in federal-tax revenues from crude sales, with only $8 billion generated in August compared to $13 billion the previous year. The rouble has also suffered, plummeting to near 100 to the dollar, the lowest it has been since the invasion. These setbacks have prompted Russia to adopt new strategies to earn more revenue from its oil exports. The country has implemented three different tactics to improve its situation.
The first strategy of pursuing higher prices for their lesser amount of sold barrels has been met with challenges. From January to August, the average price of Urals, Russia's primary grade of crude oil, was $59 per barrel, which is notably less than the $83 from the same time frame in the previous year. This can be attributed to the decrease in global oil prices from $104 to $81 during that period. However, sanctions imposed by Western countries have also made it easier for buyers like China and India to negotiate with Russia. Additionally, the g7's "price cap" has prohibited Western shippers and insurers from aiding in Russian crude oil exports unless the fuel is sold for less than $60 a barrel.
Recently, the tactic of pursuing higher prices has had some achievement. Assumptions that America's interest rates will peak, as well as reductions in production by Russia and Saudi Arabia, have assisted in making the global oil price escalate. On September 5th, the price went above $90 a barrel for the first time this year. This is advantageous for Russia, as they have created a "grey" group of tankers using old ships owned by less well-known middlemen in countries such as Hong Kong, Turkey or the Gulf. They have also implemented a government-supported insurance system that safeguards much of their distribution network from the effects of price caps. Furthermore, they have decreased shipment from the Black Sea and raised deliveries from Baltic and far-eastern ports, where it is more difficult to discover any violations of penalties. Since mid-August, the Urals have been trading above $70 a barrel.
The Western countries will likely not push for stronger enforcement of their price cap because they want to ensure they continue to receive Russian oil to avoid running out of supplies later this year if the global economy improves. As a result, even though it may be challenging to convince customers to accept a smaller discount compared to the global oil price, the value of Urals is expected to remain high. India has claimed that Urals' increased price has reduced its competitive edge compared with Gulf crude, but this claim is somewhat misleading. According to Kpler, a data firm, Urals is currently trading at a stable discount of $7 compared to the cheapest grade of Saudi crude, despite being a superior blend. India's stubbornness in negotiations may indicate that they have the upper hand.
Russia is attempting to maintain its revenue streams by adopting two strategies. The first involves marketing more of its high-quality refined oil as it reduces the amount of crude oil it sells. The second approach involves making use of its idle refinery capacity to process more crude oil. Analysts believe that Russia will forego a significant portion of the maintenance work scheduled for this month and instead complete it in the autumn of next year. Furthermore, the country is prioritizing the production of diesel, a profitable commodity, over jet fuel. In August, Russia exported more of these "clean" products than it had in any of the previous five years.
Russia is finding alternative methods to make up for the decrease in crude oil shipments. Instead of solely relying on traditional means, they are creating new pipelines to transport their oil. One approach is increasing the flow through pipelines to those European countries that continue to purchase oil from Russia, such as the Czech Republic and Hungary. This covert method is predicted to persist until 2025, when the Czech pipeline service should have more room to receive additional crude from a connected pipeline to Italy.
Russia is exploring new ways to cut shipping costs, such as using the Arctic route for cargo shipments to China. This route is shorter than traditional routes through the Baltic and Barents seas, reducing transit time and costs. Kpler, a data analysis company, reports a significant increase in Russian crude tankers using this route in 2023. The Arctic route is only navigable during summer and early autumn, but Russia plans to have year-round sailing available by 2025. However, external factors such as the global economy could still impact Russia's export income. Nonetheless, Russia is pushing forward with new ways to improve shipping efficiency.
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