Shipments Of Russian Oil Now Cannot Be Insured At A Price Higher Than US$60 Per Barrel
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Commodities are no longer fungible
Investors have traditionally regarded oil as the best example of a fungible commodity. Indeed, as someone who covered the oil and gas sector for 12 years, I was concerned with the API grade of a given field, as a differentiator of valuation of the crude oil produced from that resource. Exhibit 2 on the next page, shows what the curve of different APIs for different oil fields looks like. The positioning of the dots identifies the API and the 10-year average market price of a field’s crude oil. The colors are new—they make clear that crude oil is no longer fungible. The blue fields denote “Good Oil,” i.e., production from friends and allies. The orange fields denote “Bad Oil,” i.e., production from Russia, Iran and Venezuela. Shipments of Russian oil now cannot be insured at a price higher than US$60 per barrel, due to the ceiling imposed by the G7 and the European Union, who dominate shipping insurance in the world.
It seems that this change is structural and permanent. Traders, importers and investors now need to consider the geopolitical positioning of producing countries before investing. As a result of these changes, the world flows of crude oil need to be recalibrated, in our analysis. “Blue” oil fields are long-term winners, and those “green” (neutral) oil fields will probably have to decide at some point which color to change to.
Meanwhile, the same logic already applies to natural gas and selected metals.
