Pricing Challenges and Formation of Reverse OPEC
JPMorgan "If Russia Cuts Oil Production, Prices Could Reach $380"
[Asia Economy Reporter Hyunwoo Lee] As the U.S.-led price cap on Russian oil is being considered for implementation mainly by the Group of Seven (G7), skepticism is reportedly spreading widely among market experts. China and India are already importing large quantities of Russian oil at prices more than 30% cheaper than international oil prices, and if Russia retaliates by cutting oil production, international oil prices could surge to more than three times the current level, experts warn.
On the 4th (local time), CNBC reported citing energy market experts that opposition to the introduction of the Russian oil price cap is growing. The Russian oil price cap was first proposed by U.S. Treasury Secretary Janet Yellen in May as a sanction measure against Russia. The idea is for major oil-consuming countries worldwide to collude to set a ceiling on the selling price of Russian oil, and if Russia offers oil at prices above this ceiling, all consuming countries would refuse to import it.
According to Bloomberg News, the measure was discussed at the G7 summit held on the 28th of last month, and there were even discussions about enforcing the price cap by refusing maritime insurance for oil tankers if Russia does not lower its oil export prices.
Additionally, the U.S. government is proposing that major oil-consuming countries form a cartel-like organization similar to the Organization of the Petroleum Exporting Countries (OPEC). This proposal, called the "reverse OPEC," is reportedly under discussion with key U.S. allies. According to the Associated Press, the U.S. government is urging G7 countries and allies such as South Korea to join the Russian oil price cap initiative.
However, market experts point out that the price cap may cause more harm than good. Amrita Sen, Chief Research Officer at consulting firm Energy Aspects, told CNBC in an interview, "Since China and India are already receiving Russian crude oil at low prices, they have no reason to agree to this idea. If Russia declares it will reduce supply in retaliation, international oil prices will only skyrocket." She added, "We need to get out of the illusion that all countries worldwide think like Western policymakers."
According to CNN, Russia is exporting oil to China and India at prices $30 to $35 per barrel cheaper. Considering international oil prices fluctuate between $100 and $110, this means supplies are being provided at prices more than 30% lower. Given that these two countries are already importing large volumes of Russian oil below market prices, they have little incentive to join the U.S. and Western coalition in price collusion.
Conversely, there is a warning that if Russia retaliates by cutting oil production, international oil prices could surge dramatically. JP Morgan warned in a report on the 2nd that "Considering Russia's current abundant financial situation, it is estimated that Russia could reduce oil production by up to 5 million barrels as a retaliatory measure." The report added, "If oil supply decreases by 3 million barrels under the current market conditions, international oil prices will immediately rise to around $190 per barrel, and if production drops by 5 million barrels, prices could surge to $380."
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