G7 price cap to drive more Russian oil business to smaller, new players: Vitol

The G7 price cap on Russian oil will drive business away from larger corporates to smaller trading firms residing outside those countries, as well as prompt companies like Vitol to withdraw from those businesses, the company's CEO Russell Hardy told the Financial Times Live conference Nov. 23.

"The most likely effect is that of course we will withdraw from the business as it will be very difficult for us to comply with the regulation," Hardy said.

"The likelihood is that the price cap -- and we don't know what the number is -- will be sufficiently low that will cause some tensions between the Russians and the off-takers and that means the business is likely to migrate from large corporates to smaller entities," he added.

Hardy said there could be three prices -- one for low-value Russian product exports, one for high-value Russian product exports and one for crude oil.

"I am only imagining this on what the numbers might look like. The numbers might be kept at levels that might look like $60/b for crude, $300/t for low-value products and $700/t for high-value products. Something like that," Hardy said.

"But how that manifests itself is under discussion, probably as we speak, between G7 and EU, and obviously they are trying to align on the price that they think will not only win the political argument but also cause the minimum amount of disruption," he added.

Hardy said that for oil supplies, Europe still has to look for some answers.

"We are still in difficult circumstances in terms of oil supply, particularly in Europe. They have quite a bit of solving to do. The residual amount of Russian oil that's still coming to Europe has to find a new place to go and it will need companies, capital and ships to move it. And the price cap will likely put that problem into the hands of smaller companies that do not operate in G7 nations," he added.

Hardy said that moving oil much longer distances in older ships also raises the risk of shipping errors and accidents. Earlier Nov. 23, Trafigura CEO Jeremy Weir raised similar concerns.

OPEC+ strategy

Top energy officials from Saudi Arabia and the UAE have denied reports that OPEC+ was considering increasing output quotas by 500,000 b/d ahead of its next meeting in December after delegates said talks were underway.

In a statement to the official Saudi Press Agency, Saudi energy minister Prince Abdulaziz bin Salman refuted reports that the group of major oil producers including Russia was considering partly reversing its current 2 million b/d cut to quotas.

"I personally don't think the strategy of OPEC+ has changed in terms of maintaining low inventories and being supportive towards prices in the medium to long run," Hardy said.

"I think most people reading between the lines feel that OPEC+ thinks that $80/b to $90/b is a good price for most member nations -- that's close to their budget requirements," Hardy said.

S&P Global analysts see OPEC+ likely to roll over November-December quotas through the first half of 2023 at the Dec. 4 meeting.

It is unclear what position leading non-OPEC producer Russia will take at the next meeting, which is due to take place just one day before further EU sanctions on importing Russian oil come into force. The EU is banning seaborne crude imports from Russia as part of its response to Russia's invasion of Ukraine.

Price outlook

Speaking on the outlook for oil prices, Hardy said prices could remain weak in the first half of 2023, before going up further in H2.

"For oil prices, the challenge at the moment is probably to the downside. We will have a period of slightly weaker economic outlook and demand. There is a possibility that customers, because of the stress earlier, are better covered on heating oil around Europe. So there might be a little bit of downward price pressure in the short term," Hardy said.

He said that global oil demand could potentially see incremental consumption of around 1 million-1.5 million b/d in 2023. "That will need crude supplies to support it -- so probably a bit more bullish for H2 than H1," he added.

According to S&P Global Commodity Insights, oil prices are expected to continue to trend lower with inventory builds anticipated through May 2023. Platts Dated Brent is expected to average around $90/b in Q4, before easing into the mid $80s in Q1 and then recovering back toward $90/b by the end of 2023. Overall, Dated Brent is expected to average around $87/b in 2023, down from about $102/b this year.