The United States and the European Union have been looking for ways to reduce Russia’s oil revenues, the main source of funding for the war effort in Ukraine, for two years. Various types of sanctions or pressure on third countries not to buy Russian crude oil are some of the techniques used by the “West” to prevent Moscow from continuing to earn hundreds of millions of dollars from the sale of its “black gold”. However, this is not all that has caused the latest blow to Russian revenues. Market forces (strong supply of crude oil and weak demand) have become the West’s best ally and kyiv, and the worst enemy of Vladimir Putin and Russia.
The truth is that the collapse in oil prices is significantly eroding the Kremlin’s revenues. The sharp drop in crude oil prices in recent weeks has contributed to those revenues reaching their lowest level since February, underscoring the challenges Moscow faces. Average earnings over the past four weeks (through the previous week) fell to its lowest level since the beginning of the year, at about $1.510 million per week. The maximum of the four-week average, of $2.17 billion per week, was reached in the four weeks leading up to June 19, 2022, a few months after the invasion of Ukraine.
The price collapse has once again put Russia’s benchmark crude, Urals, at the same $60 a barrel as the G7, with the United States at the helm, and the European Union, precisely as a limit to undermine the price of a barrel. the Kremlin’s profit pile without causing a collapse of global markets. The benchmark export grade of Russian crude was trading at an average of $60.12 last Friday. The Russian Finance Ministry’s Urals crude price is calculated by the Argus Media agency, which takes into account the prices of the blend in the Baltic and the Black Sea, including the cost of insurance and freight.
Why is oil collapsing?
Fears of a deep global economic slowdown (especially in the US, Europe and China) and the unsustainable situation of OPEC (or rather its reduction plan) have turned the market upside down in a matter of weeks. The cartel has delayed the “return” of 2.4 million barrels of crude oil per day to the market, fearing that the price of oil will continue to fall. But investors know that OPEC’s plan is unsustainable (the reductions increase the market share of its rivals) and that sooner or later the cartel will open the crude oil floodgates, putting downward pressure on prices. Cutting production permanently means handing the crude oil market on a platter to the rest of the world’s producers.
In total, the price of a barrel of Brent has fallen by more than 18% since the beginning of July. Moreover, experts estimate that the price of crude oil could continue to suffer in the coming quarters until reaching a new equilibrium of around $60 per barrel in 2025, according to Citi calculations.
If oil finally reaches $60 a barrelOne of the EU and US’ “flagship” sanctions on Russian crude would lose some meaning: the $60 price ceiling for Russian oil that theoretically prevents shipping companies and traders Europeans trade Russian crude oil above this price. Over the years, it has been shown that this measure has not worked and has not been respected. However, if the price of crude oil falls to $60, Russian oil (which usually sells at a somewhat discounted price) would eventually trade at this price. In other words, the market would be able to rigorously “apply” the most severe sanctions against Russian crude oil.
Russia suffers from falling crude oil prices
The dynamics was observed in the pace of exports. Daily seaborne flows of Russian crude oil in the week ending September 8 increased by about 40,000 barrels to 3.14 million.. However, the least volatile four-week period moved in the opposite direction, falling 30,000 barrels per day to 3.13 million from 3.16 million the previous week. Aside from one week when they fell below 3 million barrels per day, shipments by this measure have been between 3.13 million and 3.25 million barrels per day since early July. So far this year, crude shipments are about 45,000 barrels per day below the average for all of 2023.
Disgust Comes to Russia for Its Now Preferred Asian CustomersObserved shipments to Russia’s Asian customers, including those with no final destination, fell to 2.92 million barrels per day in the four weeks to September 8. That was 10% below the April average.
In the case of Europe, seaborne exports of Russian crude oil to countries in the region have ceased, with flows to Bulgaria being interrupted at the end of last year. Moscow also lost about 500,000 barrels per day of pipeline exports to Poland and Germany in early 2023.when these countries stopped their purchases. In addition, deliveries to Hungary, which transit Ukraine via the southern section of the Druzhba pipeline system, appear to have been interrupted in August due to kyiv’s ban on Lukoil crude crossing its territory.
In short, Russia is suffering from the drop in the price of crude oil (it now gets several dollars less for each barrel sold), but it is also struggling to find “efficient” customers—that is, countries or companies to which it can sell crude oil without incurring significant transportation costs and other inefficiencies. Both of these factors create a new headache for the Kremlin, which needs these cash flows to continue financing a very expensive war.
