Oil Prices Are Rising

Oil futures rose on Tuesday, supported by signs that China may relax COVID-19 restrictions following protests that sent crude prices tumbling the previous session. Early on Monday, oil prices dropped sharply. They briefly wiped out their gains from 2022, as protests in China over the country’s stringent COVID-19 restrictions sparked worries about a crackdown and a further decline in crude demand. Oil recovered, ending higher, amid speculation about a deeper cut in production by OPEC+.

Attention was on Tuesday’s meeting of China’s National Health Commission. It announced efforts to vaccinate the elderly and reduce the number of boosters for people aged 80 to 3 months as China struggles with a more serious virus outbreak.

Because Poland refused to accept the suggested price level roughly the same as the price at which Russia is currently selling its oil, the European Union could not agree on the G7’s proposed price cap for Russian oil.

Poland, Estonia, and Lithuania want the price cap set at $30 per barre. Production costs for Russian oil are around $20 per barrel.

However, despite criticism that the original cap proposal effectively eliminates it because that is already the price Russia is paying for its oil, the rest of the European Union appears to favor it. It won’t cut back on its oil revenue.

The EU embargo on Russian oil imports and the G7 cap should take effect on December 5. It will prohibit companies shipping Russian oil from using Western service providers. This way, it will insure or finance its cargo unless the cargo price is at or below the cap. The proposal also prohibits the use of Western vessels.

Russia-Iran Gas Partnership

As the end of 2022 approaches, Russia and Iran are in a bitter conflict with the West. Both are subject to increasing Western sanctions. Moscow and Tehran are actively reuniting, both in the military and the energy sector, which is not surprising. A memorandum of understanding between the two nations, which is already in effect, calls for a $40 billion Russian investment in Iranian gas projects.

Given that Russia and Iran have the world’s first and second-largest gas reserves, many fear this joint action will form a “global gas cartel.” In reality, sanctions and other roadblocks may prevent these plans from being implemented.

In practice, however, deliveries of Iranian gas to the EU are unlikely for the foreseeable future. Europe and the United States have isolated Tehran from major international energy projects for the past three decades, preferring more credible rivals such as Russia and Qatar to the rabidly anti-Western Islamic Republic.

The possibility of Iranian gas supplies reaching the West was finally put to rest by US sanctions that forbade the export of LNG technology to Iran and the building of gas pipelines to Europe. Tehran consequently concentrated on its own gas needs and small-scale regional exports, mostly to Turkey and Iraq.