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Summer oil price spike looms if West’s price cap strategy fails: RBC’s Croft

The West’s latest strategy to increase pressure on Russian oil revenues while also trying to reduce global oil prices could backfire and lead to another painful price spike this summer, RBC Capital Market’s Helima Croft said during a Carnegie Endowment for International Peace event.

G7 leaders are working on a price cap mechanism that would allow Russian oil to keep flowing to India, China and other countries while the US and Europe have shunned the barrels over the Ukraine war.

Under a price cap, the governments would agree on a level at which third-country importers could buy Russian oil so that supply keeps flowing while less revenue goes to Moscow to fight Ukraine.

Croft, RBC managing director of global commodity strategy research, said those in favor of the price cap likely see it as a better alternative to Europe tightening its sanctions on shipping and insurance. She said tougher EU shipping sanctions could potentially take more oil off the market given that major importers like India rely heavily on Greek shippers and may not be able to secure cargoes in such a scenario.

But the “biggest potential point of failure” for a price cap is if Russia decides to retaliate by cutting oil or gas supplies to spike prices even further.

“We’ve seen this movie,” Croft said during the webinar. “Is Russia going to say, I have no choice, I need to sell my barrels. I’m going to go forward with this discount mechanism? Or am I going to start cutting oil exports this summer and raising the price and seeing how much economic gain you guys are really willing to endure for backing Ukraine?”

Croft said it may have been smarter for the West to aggressively target oil and gas from the outset of the war rather than signaling that leaders did not want to touch energy.

“Now we’re at the mercy of the Russians deciding when they’re going to cut flows,” she said.

Talk of the price cap has driving crude prices higher in recent days. Platts assessed Dated Brent at $122.94/b June 28, up from a recent low of $116.59/b on June 22.

New hopes for Iran deal

Given the chances for even tighter oil supply, Croft said it makes sense that French President Emmanuel Macron and others were urging the Biden administration to return to the Iran nuclear talks. If a breakthrough is reached, an additional 1 million b/d of Iranian exports could potentially come online as the 1 million b/d in flows from US Strategic Petroleum Reserve end in November, she said.

“Every barrel matters in this market,” she said.

Indirect talks between the US and Iran are set to start in Doha, Qatar, June 28, after stalling for three months.

But political challenges and a long lag time to get back into compliance with the Joint Comprehensive Plan of Action mean that returning Iranian barrels to the market could take a long time, Croft said.

“Even in a scenario where we were to get a breakthrough, it’s not a light switch,” Croft said. “That’s something that oftentimes the market participants don’t fully get – that you can’t just say, “OK, JCPOA 2.0, and tomorrow I got an additional million barrels on the market.”

Iranian oil exports rose to 850,000 b/d in June from a 2022 low of 650,000 b/d in May, according to Platts Analytics, a part of S&P Global Commodity Insights.
Source: Platts

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