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Geopolitical Uncertainty
December 5, 2022

Will the current Russian oil situation greatly influence future prices?

“A price cap on Russian seaborne oil came into force on Monday as the West attempts to curb revenue flows to Moscow's war machine. After intense negotiations, G7 nations and Australia agreed to a $60 per barrel price level, with an adjustment mechanism that keeps the cap at least 5% below the market rate and allows for revisions every two months. Crude remains Russia's economic lifeblood, especially after the country put a stop to natural gas sales to Europe (a move that was first attributed to maintenance problems and later to sanctions).

How it works: The deal allows Russian oil to be shipped to third-party countries using G7 and EU tankers, only if the cargo is bought at or below the $60 per barrel cap. The level is seen as high enough to cover production costs and encourage more output, though Ukraine's Volodymyr Zelenskyy slammed the agreement, calling it "quite comfortable for the budget of a terrorist state." G7 insurance companies, credit institutions and transport services will also have to observe the price ceiling, which is important as 95% of the world's oil tanker fleet is covered by the International Group of P&I Clubs in London and companies based in continental Europe.

While the industry is still awaiting a complete response from Russia, the Kremlin has said it will redirect its oil supply to "market-oriented partners" even if that means it will have to cut production. A presidential decree would also prohibit loadings destined for any countries that adopt the restrictions, and ban any reference to a price cap in contracts for Russian crude or oil products. "We are working on mechanisms to prohibit the use of a price cap instrument, regardless of what level is set, because such interference could further destabilize the market," said Russian Deputy Prime Minister Alexander Novak.

Outlook: Russia is the world's second-largest oil exporter, meaning how the situation plays out could influence prices in the months ahead. Many analysts still say that Russia has enough of a shadow fleet to skirt the sanctions, meaning more shipments will be rerouted, which is already happening across global crude markets. While that could keep oil prices at current levels, or even depress them based on demand factors, others are more fearful about the future, saying that a drop in Russian sales or output could lead to a surge in crude and gasoline prices worldwide.”

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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