With Poland finally, on board, the EU agreed to cap the price of Russian crude oil at $60 per barrel—higher than the levels at which Russia's Urals are currently trading.
Russia has promised to stop shipments to any country employing the price cap.
But the price cap only applies to countries hoping to use Western tankers and insurers—which means it won't apply to everyone.
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OPEC is unlikely to trim production
With India and possibly China continuing to purchase Russian crude using alternatives to Western services, it will dilute the effect of the sanctions. But there are limited options that can securely transport Russian oil to markets, so the focus will fall on tanker trackers and Russian export levels. But with India and China reportedly buying Russian flagship Urals at ar 40 % discount, both countries will find a way.
On that note, Western leaders won't make much fuss about the Asian deep discount purchases as that price point hurts Russia in the pocket and leaves more Middle East crude for the rest of the world, effectively watering down prices.
Focus on China's potential "reopening" picked up steam again last week and fueled market optimism about the tailwinds of a likely acceleration in growth in 2023 for China-sensitive assets. Although there have been several local changes to Covid policies, China hasn't officially shifted away from the Zero Covid policy just yet. Instead, it appears the Chinese government is preparing for an exit and trying to minimize the economic and social cost of Covid control in the meantime. The preparations may last a few months, and there will likely be challenges along the way.
Still, reopening sentiment should provide a plank for the crude price to springboard off. And, the faster the market prices in reopening-driven growth acceleration, the higher oil prices will go.
One major stumbling block for prompt oil prices is that a widespread official reopening is unlikely to occur until spring. So demand could remain very soft, including in the initial stages of a broader reopening of the economy.
The path for the world's most populous and second-largest economy to reopen after almost three years of zero-Covid policy will probably take more work. The combination of rising cases, some regions loosening policies, the winter flu season, and the upcoming Lunar New Year, when hundreds of millions of people typically travel, makes it difficult to predict how cases, Covid restrictions and mobility may evolve in the coming months. Given the heightened uncertainty, it's probably best to consider the experience of other countries where both Hong Kong and Taiwan are the best test tube cases..
Hong Kong and Taiwan's reopenings are most relevant for Mainland China. Their experiences suggest that cases are likely to skyrocket upon reopening and linger for a while, a high elderly vaccination rate is key to a safe reopening, and mobility declines sharply as cases rise.
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