Happy 4th.

JPM put out a report Friday assessing the risks of retaliation for the newly threatened Oil sanction increase by the G7 last week. They laid out three possible scenarios and handicapped the likelihood and circumstances surrounding each scenario happening. Here is GoldFix summary and comment

The Bottom Line:

The G7 leaders agreed this week to work on a price cap for Russian oil as part of efforts to cut Moscow’s revenues
Given Russia’s strong fiscal position, the country can cut up to 5 mbd of production without excessively hurting its economic interest
Given the high levels of stress in the oil market, a cut of 3.0 mbd could cause global Brent price to jump to $190/bbl, while the most extreme scenario of a 5 mbd slash in production could drive oil price to a stratospheric $380/bbl

How/Why Might Russia Spike Oil to $380 a Barrel?

While fiscally Russia is ok, monetarily it is a mess. Russians aren’t consuming enough, they cannot export much of anything except energy, and the Ruble is too strong. If that continues their economy risks potential deflationary depression due to Rubles coming home with nowhere to go.

Thus Russia may threaten to cut oil exports as retaliation unless sanctions against use and accumulation of their own foreign global reserves are eased.

JPM opines:

Hence, it now appears more likely that export cuts could be used as leverage in our view. Given the high level of stress in the oil market, a cut of 3.0 mbd could cause global Brent price to jump to $190/bbl, while the worst-case scenario, a 5 mbd cut, could drive oil price to a stratospheric $380/bbl.

To our eyes, this is more possible than it looks. In many ways Russia is a 3rd world country with a 1st world nuclear arsenal. Destabilization would be an immense risk not just to the EU, but to China as well. We wrote on that in February in Three Possible Outcomes for Russia

Red Rectangle for possible path if Russia Destabilizes…

Putin May Have to Use It Or Lose it

GoldFix Comment: Therefore, while we cannot speculate on price, we do believe that Russian destabilization is a small risk in the long term. We also believe that the longer Russia waits to weaponize its oil exports, the weaker the effect they will have.

Finally, unless Russia’s monetary situation improves, the risk of deflationary destabilization will grow. Cutting oil exports is an At-The-Money option with an expiration date. Use it or lose it. Especially in light of JPMs scenario 3 below.

Therefore, a Russian oil export cutback is more likely to be effective now rather than later. Our bet is this: if they will do it, and are looking to cause maximum pain and not just inconvenience then this winter would be one tactically ideal moment. But who is to say rational heads are involved on either side these days.

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JPM’s Three Scenarios

Scenario 1: Russia does not cooperate and retaliates—a 3 mbd cut would likely deliver a $190/bbl oil price while the worst-case scenario, a 5 mbd cut, could drive oil price to a stratospheric $380/bbl

The most obvious and likely risk with a price cap is that Russia might chose not to participate and instead retaliate by reducing exports.
Unlike gas, which accounts for about one-fifth of Russia’s budget revenues, oil makes up over half

How much oil production can Russia realistically cut without hurting its economic interest we wonder?

Scenario 2: China and India don’t cooperate—the end of the European insurance dominance

India has in the past carried Iranian oil for state-run Indian refiners when the West first sanctioned Iran in 2012.
China has in the past transported Iranian oil in 2013 with Iran commenting that insurance was handled by the “Chinese side.”

History shows that oil sanctions are notoriously leaky, and sanctioned oil supplies almost always find a buyer at the right price.

VBL @VlanciPictures

India should just keep buying Russian oil refine it into gasoline or other distillates and just sell it to the US top dollar if they can. Who’s gonna stop them. They pardoned Mark rich

Scenario 3: Russia fully re-routes exports from west to east but loses pricing power, prices stabilize in low-$100s

As the EU gradually transitions away from Russian energy sources, Russia will continue to re-route discounted oil toward other buyers. Additionally we expect US production growth to be especially strong for rest of 2022.

Normalization (rerouting) is already under way and is especially visible in other commodities like metals. Consequently, Russian revenues from crude oil exports have declined

Left to their own devices, energy markets tend to work very efficiently and effectively, and the market adjustment mechanism has kicked in.

***more at bottom***

GoldFix

SPECIAL: JPM Says $380 Oil Possible If Russia…

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