The oil price ceiling can be overlooked for the time being

Alexey Belogoryev, Deputy Principal Director on Energy Studies of the Institute for Energy and Finance, gave an interview to RIA Novosti about the results of 2022 for the Russian oil and gas complex and the prospects for the development of global oil and gas markets in 2023.

– In your opinion, what events have become a turning point for the Russian oil and gas industry this year?

- It seems to me that there is only one turning point - a multifaceted crisis caused by external causes - a discord in relations between Russia and the West. At the same time, Russia remained strong in what it was strong before. And where there were weak points, they were hit the most.

The crisis itself can be divided into three components. The first is an embargo on the supply of Russian energy resources (oil, oil products and coal). The second is price ceilings as an attempt to control and reduce Russia's oil and gas revenues. And the third is technological sanctions, which are especially painful for large-scale production of liquefied natural gas, high-capacity turbines, and seismic surveys.

There were and probably still are illusions that China will help us technologically. But China is still a master in the production of consumer goods, and so far, to a lesser extent, technologically sophisticated machine tools and equipment. And this is a long-term problem: the resulting technological failures cannot be eliminated in one or two years.

– You mentioned the EU embargo on Russian oil and the price ceiling. Can you evaluate the first reaction of the market?

It is contradictory. On the one hand, there is no panic - no one yet believes that the embargo and restrictions on access to European freight and insurance services will greatly reduce Russian exports. On the other hand, some nervousness is still noticeable, as uncertainty remains. As a result, prices fluctuate at the level of $80-85 per barrel of Brent, but they are not in a hurry to fall below $80 either.

- What do you think will happen when the embargo and the price ceiling for petroleum products are introduced? Will this be the end of the Russian oil industry?

We don't know yet what that ceiling will be. For the G7 countries, maintaining the export of Russian diesel fuel or fuel oil is less important, since this market is narrower and works a little differently. So far, we can definitely say that the embargo is a significant problem. We continue to supply the EU and the UK with about one million barrels per day of petroleum products. Mainly diesel, fuel oil and naphtha. And, frankly, I don’t see any obvious markets where these volumes can be redirected.

- With such a ceiling of 60 dollars, insurance and expensive freight, will we even last long?

- The current prices, minus the very expensive freight, are low, to be honest. This is the cost plus a very small margin. But now another 12-15 dollars separates us from the current FOB price to the ceiling - by this amount we can increase the price without fear of losing European freight. At the same time, the process of gradual replacement of this freight is underway - it is advisable not to force it (otherwise the freight rates will rise sharply), but it is going on. In the current conditions, the ceiling can simply be ignored, because it does not affect anything. It's hard to predict ahead.

– Could you share your forecast for oil and gas prices for the next year?

– I think that the prices on average for the year will remain somewhere around $80 per barrel of Brent, give or take. At the same time, their average daily volatility can be very high, depending on what will happen in the market. But while the situation does not look such that there will be a collapse in prices or some kind of sharp increase.

As for gas, Europe will objectively need to continue to poach LNG cargoes from Asia. This will inevitably keep prices high enough. I do not yet see any serious prospects for the average annual price to drop below $1,000-1,200 per thousand cubic meters (TTF). It is more likely that it will be closer to $1,500.