EU agrees on Russian oil price cap: expectations for Azerbaijan

By Trend

EU member states have approved a cap on Russian oil prices at $60 a barrel, which comes into force from December 5.

The document adopted bans sea transportation of products above this price. So far, the restriction will affect crude oil, and, from February 5, a cap on petroleum products will be set. The EU document states that this figure must be at least 5 percent below the market price.

An embargo is also lifted on oil supplies from Russia to Europe by sea. At the same time, exports through the Druzhba oil pipeline are preserved. Thus, the cut totals 2.2 million barrels out of the total volume of oil supplies to the EU (4.5 million barrels per day).

The International Energy Agency (IEA) predicts that Russian oil production will fall by 1.4 million barrels per day next year after the EU ban on Russian oil imports takes affect.

The IEA experts believe that the decision to deprive Moscow of revenue will create additional uncertainty in the oil markets and raise pressure on prices, including diesel fuel.

At the same time, a proposed oil price cap could help ease tensions, however, many uncertainties and logistical challenges remain.

As Azerbaijani energy expert Ilham Shaban told Trend, the Russian price cap will certainly affect energy markets.

"At the initial stage, the market will be affected by emotional factors, as the two parties (the countries that made this decision and Russia) will come out with opposite opinions. Since the decision was actually made on Friday, when global stock markets closed, we will see the outcome on Monday. However, we already saw a significant drop in oil prices: February Brent futures traded around $85.5 in electronic trading on Friday," the expert said.

As Shaban noted, the information released by the US Treasury states that Russia can continue to supply oil to world markets, if that prices do not exceed the established upper limit.

"According to the Russian Ministry of Finance, the average realized price for Urals oil in November was $66.47. But in November, the cheapest batch of Russian oil was sold for $52. In other words, based on these statistics, the latest ban imposed by the West on Russian oil is a kind of legalization of the current situation on the market. The goal is also to force Russia to cut oil production. Of course, other players should take Russia's place. Unlike the gas market, this takes less time in the oil market. Oil from the US, Saudi Arabia, Iraq, Libya and Venezuela can replace the lost volumes of Russian crude," he said.

As for Azerbaijan, the expert noted that the price of oil that we put on the market is not determined on international exchanges.

"Azerbaijani oil is guided by the daily spot price of Brent. But Azerbaijani oil prices may exceed Brent prices, since with a decrease in sales of Urals oil in Europe, demand for light grade oil should increase. Here we are talking about Ceyhan BTC Blend oil, which we export to the global market through Türkiye," he noted.

According to the State Customs Committee, almost 22,682,798 tons of crude oil and oil products worth $17.180 billion were exported from Azerbaijan from January through October 2022, compared to 23,800,444 tons ($11.220 billion) over the same period of 2021.

Thus, Azerbaijan's revenue from the export of crude oil and oil products increased by 53.1 percent year-on-year.

The share of crude oil and oil products in Azerbaijan's total exports in the reporting period amounted to 49.49 percent, compared to 66.59 percent a year earlier.