A discount on Russian oil: do we need urgent measures to reduce it

Alexey Belogoryev, Deputy Principal Director on Energy Studies of the Institute for Energy and Finance, commented to Forbes on the Russia's possible retaliatory actions against the use of the "price ceiling" for Russian oil by Western countries.

The mechanism of the oil price ceiling is designed in such a way that any direct countermeasures such as a ban on transactions and the establishment of a price floor are obviously ineffective, Belogoryev believes. He recalled that the price limit is set not for suppliers and buyers, as in the case of gas futures prices in the EU, but for Western companies providing freight, insurance and financing services for the sea transportation of Russian oil.

"Accordingly, the only adequate response to this mechanism is the creation of an alternative, and at the same time quite global, infrastructure for sea tanker transportation," the expert says. — This process has been going on since the spring of 2022, but it is objectively not fast and quite expensive. It will probably take at least two or three years to create a full-fledged infrastructure, and until that moment, the sea transportation of Russian oil (and from February 5 and petroleum products) will remain dependent on European freight carriers from Greece, Cyprus, Malta and some others. To a lesser extent, it depends on the freight of the importing countries themselves. Problems with insurance also remain, but they do not look so acute."

The discount may decrease without additional measures

"Probably, corporate lawyers will be able to sort out the intricacies of the US, UK and EU sanctions regimes within two to three months, and some transport companies will resume work with Urals," Belogoryev hopes. — This, in theory, as the supply grows, should already lead to a reduction in freight rates in the spring and, last but not least, sky-high margins that international traders charge for the resale of Russian oil. As a result, the total value of the Urals discount to Brent (FOB) may drop to $20 per barrel. It is also difficult to call it fair or healthy, but it is close to the initial expectations."

The expert adds that Russian suppliers can accelerate the process of normalization of the freight market by reducing demand for it, using their own expanded fleet. In addition, it is necessary to negotiate with all market participants, especially with those who are concerned about possible legal risks.