Author: Rong ping source: official account: Rong Ping (id:rongping898) has been authorized to reprint
Recently, international oil prices have fluctuated violently, mainly down. The current price has fallen by more than 20% from the peak on March 8, and has entered a technical bear market. The sharp fall in oil prices is undoubtedly good news for countries suffering from high inflation and high oil prices.
The Biden administration of the United States can finally say that its efforts to control inflation have achieved results;
China’s domestic high retail price of refined oil has finally ushered in a window to continue to reduce;
The tension of soaring energy prices in the European Union finally got a breather
In the past period of time, the Russian Ukrainian war was undoubtedly the main driver of higher oil prices. Biden’s “Putin’s price rise” is reasonable. However, the United States, the West and Russia are inseparable from who provoked the war. The high oil price is the result of the joint action of many factors.
The expectation of economic recession is only a conventional factor of the sharp decline in oil prices, and it is reasonable to use economic recession to explain the decline in oil prices at any time. Those who hold this view have not found the crux of this round of oil price collapse. It has not been a day or two since the epidemic hit the global economy. Why did oil prices soar and plummet during this period? This is obviously not a question that can be answered by insufficient demand caused by economic recession.
As we all know, the relationship between supply and demand is the decisive factor in commodity prices. Rising oil prices are either insufficient supply or increased demand; The decline in oil prices is either an increase in supply or a contraction in demand. And the impact of oil prices is also an issue in terms of supply and demand. The demand here is not the insufficient demand caused by the economic recession mentioned above, but the energy demanders reduce demand through concerted action to force the energy suppliers to reduce oil prices.
The reason why the oil price plummeted this time lies in two things: first, the G7 jointly issued a “price limit order” for Russian oil, forcing Russia to reduce prices by threatening demand; Second, Biden is about to visit Saudi Arabia to persuade Saudi Arabia to increase production and suppress oil prices by increasing supply. One is to make an issue on the demand side, and the other is to make an issue on the supply side.
This time, G7 formed a Russian oil “price fixing” alliance, and there was no consensus on the extent of price fixing. At this time, Japan jumped out and said that it would cut the price of Russian oil exports by half, that is, let Russia export at about 50% of the current oil price.
The so-called “price fixing” alliance is actually a collective agreement to stop importing Russian oil above a certain price, forcing Russia to reduce prices by threatening demand and the market.
But the key to the oil price game is whether it is a buyer’s market or a seller’s market. If it is a buyer’s market, that is, the bargaining power is on the buyer’s side. In this way, consumers can naturally force suppliers to reduce prices, especially when there are multiple suppliers, the effect of buyer bargaining is more obvious.
For example, Biden’s visit to Saudi Arabia is actually to increase the bargaining power of the G7 as a buyer through a two pronged approach of supply and demand. In other words, Russia is not the only oil supplier, but also OPEC led by Saudi Arabia. If Saudi Arabia increases its oil supply, Russian oil will not be so popular, and the crude oil price can naturally be adjusted at the price expected by the United States and the West.
Moreover, it is not the purpose of the G7 to force Russia to reduce prices. The ultimate goal is to make Russian oil lose money, and the financial resources are insufficient to support the military operations of the Russian army in Ukraine.
We know that Rosneft has a profit and loss line of $70 per barrel, that is, Russia can only make profits if the oil price is higher than $70, otherwise it will lose money. If the international oil price falls below $70, which is close to the target price of 50% discount of the G7, Russia will not be able to calmly fight a protracted war on the battlefield of Ukraine. This is the fundamental purpose of G7’s price fixing alliance.
So, can G7’s wishful thinking succeed?
I think it’s a big problem.
First of all, Russian oil is not only a buyer of G7 countries, but also buyers of China, India, Brazil and other countries. If G7 requires Russia to sell oil at a 50% discount, then other buyers naturally require the same discount. But this is actually a false proposition. If China and India continue to buy Russian discount oil to support Russia’s crude oil supply, then it is impossible for the G7 to buy Russian oil at the same discount.
This is what we said above. Russian oil is a seller’s market. Due to the large number of buyers, Russia has the pricing power. Therefore, the G7’s purpose of asking for a discount from Rosneft cannot be achieved.
Secondly, the opinions of G7 on the price limit of Russian oil are not highly unified. For example, Germany, the chairman of the G7, is opposed to the Russian oil price limit this time.
When expressing his position, the German Deputy Prime Minister said clearly and forcefully that Germany would not set a price ceiling for oil prices, which was a “wrong signal”. If Russia retaliates by reducing oil production because of the price ceiling, the energy prices around the world will be more magnificent and volatile.
Germany’s concern is not unreasonable. After all, Russia is an important oil producer in the world, and there is a fixed oil pipeline with Europe. Even if Saudi Arabia agrees to increase production, it is far from being thirsty for Europe and cannot completely replace Russia’s oil supply.
Therefore, it is difficult for the G7 to reach a consensus on the price limit of Russian oil.
Finally, Russia cannot be beaten passively. As the German Deputy Prime Minister said, Russia can retaliate against the G7 price limit by reducing production. If supply is cut, it is naturally difficult for oil prices to fall.
In today’s world, energy is still the “seven inches” of the world. Whoever owns energy has the right to price and speak. At least until the success of the new energy revolution, oil is still the lifeblood and blood of the global economy. The United States dares to confront Russia because of its abundant oil supply. What about the European Union? Russia can hold oil to make the European Union. If the European Union follows the United States in imposing price limits, the knife of sanctions will fall off. If Russia cuts off oil and gas to the EU, EU inflation and social contradictions will rise several levels.
As for Biden’s upcoming visit to Saudi Arabia, the extent to which it will hit oil prices depends on the extent to which Saudi Arabia cooperates with the United States.
Now Saudi Arabia undoubtedly plays a key role in oil prices. Since Saudi Arabia announced to reduce oil supply to China last month, and Russia became China’s largest oil supplier, Saudi Arabia’s attitude has undergone subtle changes.
After the outbreak of the war between Russia and Ukraine, the leaders of Saudi Arabia, the United Arab Emirates and other countries refused to answer Biden’s phone calls and refused to cooperate with the United States to increase production, which was an important reason for the soaring oil prices. The United States must also know the key to this, so it tries to induce Saudi Arabia to change its plan and increase production.
Biden’s personal relationship with the Saudi royal family is not good. This forced planned visit must be reluctantly giving Saudi Arabia a lot of consideration, such as the United States helping to deal with the Hussein armed forces and providing military assistance to Saudi Arabia.
So is the fall in oil prices sustainable? Is high oil prices gone forever?
This largely depends on Russia’s counter-measures. If Russia’s oil production is significantly reduced, even if Saudi Arabia and OPEC members increase production, it may not be able to suppress oil prices.
On July 2, JPMorgan Chase warned in a report that if the sanctions of the United States and Europe make Russia implement retaliatory production cuts, the global oil price may reach $380 a barrel. JPMorgan Chase believes that Russia is likely to bring pain to the west by reducing crude oil production and exports. This is in line with Germany’s concerns.
Contrary to JPMorgan Chase, Citigroup predicted in a report that if the economic recession strikes, the price of crude oil may fall to $65 / barrel by the end of this year and $45 / barrel by the end of 2023. The premise of this prediction is that opec+ oil producing countries will not intervene and oil investment will decline.
Whose prediction is more reliable?
Although JPMorgan Chase’s $380 oil price forecast is too outrageous, it may be logically more realistic than Citigroup, because Citigroup’s expectation premise is based on the absence of any intervention by opec+ oil producing countries, which is almost impossible in reality.
Moreover, there is a very important reason for the rise in oil prices, that is, the over issuance of currencies in western countries, that is, the global liquidity flooding has pushed up the prices of energy and resources, as well as food prices. In fact, it is not just a problem at the level of supply and demand, but too abundant liquidity, and too much money chasing limited commodities, leading to price increases and inflation.
If the current situation of excess liquidity does not change substantially, the situation of global inflation will be difficult to ease. This is what we said above. The war between Russia and Ukraine is indeed an important driver of high oil prices, but the root cause is not here, but the irresponsible monetary policies of European and American countries.
Therefore, the low oil price that the West wants may not be achieved by limiting the price of Russian oil. Not only is oil a seller’s market now, but opinions within the G7 are not unified. China and India will also have different strategies for Russian oil, which cannot make Russia yield through the so-called “unity”.
Of course, for Russia, it is impossible to keep the oil price above $100 for a long time. The final result is likely to be that the oil price fluctuates within the range of $70-100, neither falling too much nor rising too much. Russia is likely to accelerate its advance in the Ukrainian battlefield and win the war as soon as possible.
Because it is difficult for the oil price to stand above $100, Russia will make a lot of money. With Saudi Arabia being persuaded by the United States to increase production, and countries around the world may become more consistent in limiting the price of Russian oil, the golden window period for Russia to export high-priced oil is likely to be over.
For example, in China, the high oil price has made fuel owners complain, while the domestic refined oil price is pegged to the international oil price. If the international oil price continues to rise, China’s refined oil price will remain high. If the international oil price continues to fall, China will have the possibility and space to continuously reduce the retail price of refined oil, so as to appease the dissatisfaction of consumers.
Therefore, with the passage of time, high oil prices may become more and more the target of all countries in the world. This will be increasingly detrimental to the direction of public opinion of Russia on the battlefield in Ukraine. If countries join the camp of denouncing Putin and high oil prices, Russia’s situation will become very dangerous.
For Russia, it is actually beneficial to lower the oil price a little, but not particularly low.
In addition, Russia can also take the means of breaking down one by one to deal with the encirclement and suppression of the G7.
For example, Japan, which danced the most, should be severely punished by cutting off energy supply.
Russian President Vladimir Putin signed a presidential decree on June 30, announcing that due to the impact of Western sanctions, Russia will establish a new company to take over the energy cooperation development project “Sakhalin 2” between Russia and Japan.
Nearly 10% of Japan’s imported liquefied natural gas comes from Russia. This presidential decree is even worse for Japan, which is already short of power supply. The threat of power cuts in Japan has become increasingly imminent.
Gazprom holds 50% of the shares of Sakhalin 2, followed by European oil giant shell, which holds 27.5% of the shares, and Mitsui and Mitsubishi, two Japanese energy companies, jointly hold 22.5% of the shares.
After the outbreak of the conflict between Russia and Ukraine, the European oil company shell has indicated that it will withdraw from “Sakhalin 2”. Unlike shell, Japanese Prime Minister Fumio Kishida made it clear in March that Japan would not withdraw from the Sakhalin 2 project in order to ensure energy security. The issuance of the presidential decree made the Japanese government highly nervous.
Therefore, Russia can grasp Japan through Sakhalin 2. In addition, there are other tricks, such as the four northern islands, Diaoyu Islands and other issues. Recently, Chinese and Russian warships have appeared near Diaoyu Islands.
For the United States, the initiator of the price limit order, what Russia can do is to stop supplying discounted oil to it.
After the outbreak of the war between Russia and Ukraine, the United States was not the same, shouting an oil embargo on Russia, but it was very honest, and even the scale of oil imports from Russia reached a new high. For such opportunists, they shouted to limit the price of Russian oil, dragged European pig teammates to impose sanctions, and finally secretly sold the low-cost Russian oil to Europe and other countries, which has no credibility at all.
Russia may harden the United States and tighten its energy supply. This time, Biden was eager to visit Saudi Arabia, because this time, Russia was about to make a real move, and the United States could only seek more oil supply in its own “basic market”, especially through Saudi Arabia’s statement of increasing production to affect the market’s expectation of oil prices and drive down the oil price.
For Europe, it is now a mess. Germany was the first to oppose the Russian oil price limit order; Now the British Prime Minister Johnson, a lackey of the United States, is forced to resign, which shows that the hearts and minds of the G7 have diverged. In addition, Russia is pinching the neck of European energy supply, and it is difficult for European powers to follow the oil price limit order of the United States. Therefore, Russia doesn’t even need to do anything to Europe, and there is already a lot of quarrel within Europe.
In fact, what is more critical at present is the attitude of China and India. Although China and India will not impose any price restrictions on Russia, it is an indisputable fact that high oil prices harm people’s livelihood. In particular, China must respond to consumer concerns by reducing the retail price of refined oil. Therefore, China and India do not welcome high oil prices. Although China and India can buy discounted oil from Russia, it is also based on international oil prices, and it is impossible to discount too much.
As time goes on, more and more countries may oppose high oil prices, which may be the greatest strength for the United States and Europe to encircle and suppress Russia. Therefore, Russia’s military action in Ukraine cannot be sustained for a long time, but should end the war as soon as possible when the oil price hovers in the range of $70-100, otherwise, it will be increasingly detrimental to Russia.
At the end of the article, the author has something to say
The world is opposed to high oil prices, and Putin may face a crisis never before seen.
Although the high oil price is not entirely caused by Putin, for the vast majority of people, it is difficult to recognize the deep-seated reasons for the rise in oil prices, such as the overflow of liquidity caused by the excessive issuance of money in the United States and Europe, and the energy supply gap caused by the radical new energy revolution.
Therefore, under the guidance of western public opinion, “Putin’s price rise” will be considered by many people as the culprit of high oil prices. The G7’s Russian oil price limit order is not only a unified internal consensus, but also a global alliance to fight against high oil prices. Even BRICs countries such as China, India and Pakistan complain about high oil prices, which gives the world the possibility to resist high oil prices unanimously.
Therefore, for Russia, the high oil price of more than $100 is not the maximization of its interests, because it must take into account the situation in the Russian Ukrainian battlefield and the direction of public opinion, and the oil price appropriately higher than the profit and loss line of $70 is reasonable, which is the fundamental support for Russia to continue to control the situation in Russia and Ukraine. Based on this, appropriate compromise may be Putin’s wisest choice.