The oil price cap
We’ve got a few client questions about how the oil price cap is meant to work. Unfortunately, the news is very vague and often contradictory.
The basic idea is that all the big importers band together and agree not to purchase above a certain price, using their collective bargaining power.
And they are trying to put in place the systems necessary to check and ensure compliance by participating members and establish the punishments for non-compliance (like no access to insurance).
Russia, of course, says, “do what you like; we’ll just cut you off if you try”.
Now gas flows have already slowed to zero from Nordstream 1 and 2, compounded further (and permanently) by the recent sabotage, the possibility is that oil flows dry up too, in response to the above.
We have no idea where the cap is up to, and I think trying to trade the headlines will send you just as broke as the same trading of headlines in the lead-up to the war.
Overall, with the Fed set to engineer a solid slowdown in global growth, demand is set to fall, and in the interim, Russia seems to be getting coal, gas and oil to places like India and China in lieu of Europe.
Longer run, the urgent need to transition away from hydrocarbons and, at the margin, the increased adoption and extension of nuclear power, continue to suggest that big LNG operators will not achieve the targeted multi-decade returns needed to justify their capex.
If the Fed knocks the energy producers over (i.e. there are sizeable falls in their share prices) we would grow more interested.
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