Next few days will be crucial for global economy - Rvpg media

Next few days will be crucial for global economy

Russia’s predicament

There have, however, been price impacts because China, India and the other buyers have used Russia’s predicament – its oil sales are fundamental to its ability to finance the war and offset the impact of the extensive Western sanctions on its economy – to demand and obtain big discounts.


At the start of this year, pre-invasion, Russia’s Urals crude traded at about $US73 a barrel, a discount of about $US5 a barrel, or 6.5 per cent, to the global benchmark Brent product.

By mid-year, with Brent trading at around $US100 a barrel, that discount had blown out to $US21 a barrel and in the past few days to about $US30 a barrel, or more than 37 per cent. Brent crude is now trading around $US82 a barrel and Urals at just under $US52 a barrel.

That appears to be a function of at least two influences. One is the slowdown occurring in the major economies, including China’s, and the other is the impact of the existing and looming embargoes and sanctions on Russian oil.

With global economic activity slowing, so has the demand for oil. Significant reductions in European purchases and the embargoes by the US and others have given the handful of remaining buyers more leverage in a market where supply is greater than demand.

The imminent imposition of the bans on insurance and other services for Russian cargoes carrying crude purchased above the price cap also seems to have had something of a chilling effect on the availability of transport for Russian oil, albeit not as significant an effect as would be the case if a cap at the lower end of the current discussion were to be introduced.

Financial sanctions

That might suggest that the financial sanctions on tankers shipping Russian crude and the uncertainties and risks they generate are much more important than whether the cap is $US30 a barrel, $US65 a barrel or whether there is a cap at all.

Few shipping companies, ports or canals would want to carry or provide access to uninsured cargoes, or cargoes covered by anything less than insurance issued by reputable and financially strong insurers.

The US thesis is that if the cap is set above Russia’s costs of production, estimated at around $US40 a barrel, Russia will continue to produce oil even though it would generate far less revenue.

That might be a misreading of Russia’s determination to use energy as leverage to weaken the West’s resolve and reduce its assistance to Ukraine, although shutting down production for a prolonged period could do permanent damage to Russia’s oil wells and its economy.

In any event, the widespread outbreaks of COVID in China and its reflex response – lockdowns impacting regions that represent about 20 per cent of its economy – will weaken an already spluttering Chinese economy and its demand for oil.

With only a very limited pool of buying that China dominates – it has been buying about two thirds of Russia’s seaborne oil exports and half its pipeline exports — the demand for Russian oil is also likely to weaken, with or without the price cap.

Unknown factors

The unknown factor in the supply-demand equation is OPEC, which defied the US last month by cutting oil production by two million barrels a day. Russia is an associate member of OPEC and the US saw the move as one designed to help boost demand for Russian oil.

As it has transpired, the oil price has kept sliding despite the reduced production. Brent crude was above $US90 a barrel when that production cut was announced.

With the global economy sliding towards recession, OPEC – which meets again on December 4, a day before the EU and G-7 measures come into effect – might be expected to consider another reduction in volume.

That would infuriate the Biden administration, but OPEC will probably be more concerned about balancing supply and demand than the geopolitics, even if a tighter market and higher prices help Russia in the process.


The OPEC oil cartel is also very concerned that the buyers’ cartel that has formed to sanction Russian oil could, despite US assurances, one day be used against it, and undermine its control of the oil market.

The prospect of an OPEC production cut might be one of the factors behind the push by the EU to set a price cap solidly above the prices Russia is currently receiving for its oil so that the market doesn’t tighten so much when OPEC and Russian production is withdrawn that prices leap into the stratosphere and the looming recession turns into something far uglier.

That’s why the next few days with the Europeans deciding on the price cap and OPEC deliberating its strategy are going to be vitally important, not just for the outcome of the war in Ukraine, but for the fate of an already faltering global economy.

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