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Price cap on Russian oil may lower discounts, widen buyer pool: Vitol's Muller

Highlights

G7 countries agree to finalize deal on price cap

OPEC+ needs to take heed of Iran nuclear talks

Lack of spare capacity creates `risk premium'

The G7 countries' agreement to finalize and impose a price cap on Russia's crude exports may diminish its current discounts against global benchmarks and widen the pool of buyers of its oil, the head of Vitol Asia said on Sept. 4

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G7 countries agreed Sept. 2 to "urgently" finalize and implement a price cap on imports of Russian oil as part of efforts to hit Moscow's vital oil revenue and ability to fund the war against Ukraine.

"The markets where most Russian crude oil is flowing and will now flow once the sanctions take further effect later this year will be spread out more widely," Mike Muller told the Gulf Intelligence daily energy webcast.

"So, the discounts we are currently seeing in place for Russian crude oil and product exports will possibly diminish at the same time that more participants are brought into the fold."

Finance ministers from Canada, France, Germany, Italy, Japan, the UK and US said Sept. 2 they "commit to urgently work on the finalization and implementation" of the prohibition of maritime transportation of Russian-origin crude oil and petroleum products globally unless the oil is purchased at or below a price cap. The G7 announcement came a day after Russia's top OPEC+ negotiator, Alexander Novak, said the country will refuse to supply oil to countries or companies imposing proposed price caps, adding that none of its partners in the oil exporters group supported price restrictions on Russian crude.

World needs Russian oil

No detail of the price cap level or timing was given by the G7 ministers, who said they aimed to align the implementation of the cap with the timeline of measures in the EU's sixth sanctions package which bans most Russian oil imports by early 2023.

EU sanctions on Russian-related services such as the financing and tanker insurance also go into effect Dec. 5.

Currently Russian crude trades at a discount to global benchmarks, which has helped Moscow attract buyers in Asian countries including India and China.

The world cannot live without Russian oil and parallels between sanctions on Russia and Iran cannot be drawn due to Russia's ability to produce around 11% of the global oil supply.

"A way must be found to allow Russian oil to continue to flow into markets because unlike the inventory build of gas in Europe...that does not apply for oil," said Muller.

"We have to bear in mind that Russia's production is a much larger number than Iran's production, so we can't draw parallels about sanctions taking effect in Russia in the same way as Iran because Russia has capacity to produce 11 million b/d of oil."

Iran deal odds

However, oil markets and OPEC+ need to take heed of the potential lifting of US sanctions on Iran and the return of more barrels from Tehran amid the resurgence of talks since mid-August about a nuclear deal. The US administration of Donald Trump withdrew from the 2015 Joint Comprehensive Plan of Action, infuriating Iran and complicating efforts to export its crude without the threat of sanctions.

"The whole of the mindset around will there or will there not be Iranian oil in the market is extremely important for OPEC+ to take into account," said Muller.

"That absolutely matters as we come into the peak demand period for Asia in particular and in terms of the October period where in Asia large NOCs tend to sign up contracts for the next calendar year."

Odds of a nuclear deal reached this year are "a toss-up," according to Platts Analytics. Platts is part of S&P Global Commodity Insights.

"Our reference case still assumes an agreement remains out of reach through 2023, but a near-term deal to resuscitate the 2015 JCPOA could lift crude and condensate exports by 1.0 million b/d by March 2023," Platts Analytics said in a recent note.

Besides Iran, markets are watching for a potential oil output cut by OPEC+ after Saudi energy minister Abdulaziz bin Salman broached the topic in August, citing a disconnect between physical and futures markets.

Potential OPEC+ oil cut

OPEC+ ministers are due to meet Sept. 5 to decide on October production targets.

"The period of price stabilizations after COVID and OPEC+ is also over and there is a big question over the what next," said Muller.

"By expressing the willingness to take oil off the market in response to either oil coming into the market from Iran sanctions being dropped or from the lack of demand in China due to COVID repression measures serves as a reminder that we are not going to see everybody producing flat out."

The market also is dealing with a risk premium due to the lack of spare oil capacity in the market particularly since Saudi Arabia, UAE and Kuwait are likely the only OPEC countries capable of supplying the market with more crude.

"People do worry about spare capacity not just for geopolitical disruptions but also weather disruptions and of course the entire sanctions picture," said Muller.

The lack of spare capacity is coupled with less crude in US Strategic Petroleum reserves amid continued drawdown of oil stocks from the US and other countries, he added.