Ever since Russia started its war against Ukraine in February earlier this year (what a long year!), western countries are overtly and secretly trying to cut Russian revenues that can be used for financing the war. The two big elephants in the room are Russian oil and gas. Most of the talks have been about imposing a "price cap" on Russian exports of both commodities which would deprive Putin of a big deal of resources. This is of course much easier said than done, as Russia is not going to stand idly. It has publicly threatened on multiple occasions to stop its exports to any country going along with the cap.
Well, after several months if back and forth discussions, it seems that western countries have finally decided to "bite the bullet" and impose a $60-per-barrel limit on the price at which Russian oil can be traded outside the bloc starting on December 5th…
Naturally, The US Department of the Treasury has threatened to sanction any country that violates the price cap. Meanwhile, the Russian government has reiterated it would halt oil flux to any country that falls in line with it!
Now, it doesn't take a geopolitical expert to understand that such a cap may take dozens of countries to one hell of a crossroads. For some, it will literally come down to deciding between being sanctioned by the United States or running out of Energy because of Russia. That is not an easy decision to make!
How will Russia respond?
From what I’ve read, Russia’s oil production costs something like $20-25 which leaves a good margin to gain for Russia even under the imposed price cap. While this pisses off Ukraine's leaders and its harder-line allies such as Poland, which wanted to see the Kremlin lose much more revenue from its oil sales, I think it a deliberate move by the US and western countries to lure Russia to give up its previous threat and keep on exporting oil to Europe and other countries. After all, the last thing the US and its allies want at the moment is a huge shake in global oil supply which could affect the entire world and push inflation to the sky.
Despite that though, there is no guarantee that Russia will actually keep selling under the cap, and if it decided not to do so, then it's hard to imagine how high global oil prices could go!
In fact, Russia made clear that it rejects the price cap as a whole and will stop supplying the nations that endorsed it. In my opinion, this is what we can easily call a “worst-case scenario”…
“From this year, Europe will live without Russian oil”
Mikhail Ulyanov, Russia’s permanent representative to international organizations in Vienna
It is happening at the worst time:
We’re living at a time when inflation is running at a 40-year record and OPEC has cut the global oil supply already! There is a war going on draining the world's oil and food resources. There are supply chains broken by a pandemic that is tenaciously refusing to leave us alone. To top it all off, winter is on the horizon asking for an increase in the supply of oil and gas
On the demand side of the equation, we have the United States which has been emptying its strategic petroleum reserves for months and will be looking for ways to refill them at some point next year.
Another thing on the demand side is no other than China which is believed will reopen its economy sooner than planned after the recent protest against the government's "zero-covid" policy. If it does, it will create a massive surge in manufacturing-related energy demand!
As you can clearly see, If Russia refuses to sell its oil under the cap, it is the perfect recipe for an energy crisis over the coming winter. One that would do direct damage to the economy in the form of higher prices and another indirect damage to the economy in the form of higher interest rates from central bankers trying to fight inflation!
Obviously, it is difficult to imagine how crypto and stock markets can go in any other direction but down in these kinds of conditions!
I hate to be the bad news carrier, but I have an awful feeling that we might see another bearish wave that takes all assets much lower than they currently are. One that shakes retail investors to the core and causes institutions to run screaming into the arms of the FED... Let’s hope I’m wrong about that one…
What do you guys think about the price cap on Russian oil?
Do you think Russia is going to take it or leave it?
I’m keen to read opinions and thoughts…