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HomeMarketThe Murky Pricing Math Behind Europe’s New Oil Sanctions

The Murky Pricing Math Behind Europe’s New Oil Sanctions

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Starting on Dec. 5, Europe is poised to ban seaborne Russian oil shipments and to cap prices on Russian oil elsewhere. This has some oil traders worried that the result could be another spike in crude prices globally. Others, however, believe a ban could have the reverse effect.

Much of this traces back to how oil sanctions operate. For the most part, sanctions have not forced oil from countries such as Iran, Venezuela, and Russia off the world market. They just make them sell their oil at a discount. Buyers demand lower prices for the risk of dealing with a sanctioned regime.

Recently, India and China have bought Russian oil that the U.S. and Europe have spurned, but they’re demanding as much as 25% off global market prices “Right now, 20% of the world’s oil is sanctioned,” says CIBC Private Wealth US analyst Rebecca Babin. “[That oil is] trading at various discounts. And they [sellers] are going to try to undercut each other to move those barrels.”

Russia shipped some 1.5 million barrels of crude per day to Europe before invading Ukraine. Today, Russia exports some 600,000 barrels daily to Europe, diverting most of the rest to Asia. Can the market absorb the 600,000 that Europe will ban on Dec. 5?

If it can’t, there’s a good chance prices will rise, because Russia will have nowhere to sell those barrels, and overall global supply will fall. When rising demand meets diminishing supply, prices have nowhere to go but up.

If big importers like China and India take delivery of Russian oil, they’re “much more likely to go after those dirty barrels” than to buy Brent crude [the global benchmark] at higher prices, Babin says. As sanctions mount, more buyers may get that choice, extending oil’s recent slump.

Next Week

Monday 12/05

The Institute for Supply Management releases its Services Purchasing Managers’ Index for November. The consensus estimate is for a 53 reading, slightly lower than October’s 54.4. That was the lowest figure for the index since May 2020, as the services sector of the economy continues to slow.

Tuesday 12/06

AutoZone
releases first-quarter fiscal-2023 results.

Fortune Brands & Home Security and
Norfolk Southern
hold their 2022 investor days.

Wednesday 12/07

Brown-Forman,

Campbell Soup,
and GameStop report earnings.

International Flavors & Fragrances
and
Southwest Airlines
host their annual investor days.

Lowe’s holds its 2022 analyst and investor conference in New York. The company is expected to provide long-term financial targets.

The Federal Reserve reports consumer credit data for October. In September, total consumer debt rose at a seasonally adjusted annual rate of 6.4% and topped $4.7 trillion for the first time.

Thursday 12/08

Costco Wholesale
reports first-quarter fiscal 2023 earnings. Shares of the membership-club discount retailer fell 7.3% this past week, as November sales, released on Wednesday, came up short of expectations.

Broadcom,

Chewy,

Cooper
Cos., and
Lululemon Athletica
hold conference calls to discuss quarterly results.

General Electric
holds an investor day in New York to discuss the GE HealthCare spinoff. GE shareholders will receive one share of GE HealthCare for every three shares owned. The spinoff is slated to take effect after the market close on Jan. 3, 2023. GE HealthCare will trade under the ticker GEHC on the Nasdaq exchange.

Cisco Systems
and
Medtronic
hold their annual shareholder meetings.

The Department of Labor reports initial jobless claims for the week ending on Dec. 3. Jobless claims averaged 228,750 in November and have crept higher from historically low levels since earlier this March.

Friday 12/09

The Bureau of Labor Statistics releases the producer price index for November. Economists forecast the PPI to rise 7.2%, year over year, after an 8% jump in October. The core PPI, which excludes volatile food and energy prices, is expected to increase 5.9%, slower than the 6.7% gain previously. Softer-than-expected CPI and PPI readings in the past month have raised hopes that the Fed pivot—or at least pause—is almost here.

The University of Michigan releases its Consumer Sentiment Index for December. The consensus estimate is for a 57.5 reading, about one point above November’s.

Credit: marketwatch.com

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