1. Lets try to explain why actual price is less important than refinery margin

A refinery buys crude oil and sells products. Therefore, has a natural hedge. It buys crude oil versus Dated brent and sells versus ICE Brent. (Dated Brent price is constructed from ICE Brent)

2. The refinery tires to make sure the amount of crude it buys each day is the same as the amount of products it sells each day. It does this by changing the pricing period of the crude oil using dfls and cfds. Therefore, you have flat cash flow on the benchmark.

3. the refinery margins is determined from the cracks received for the products minus the costs.

Costs include the crude oil freight, the freight insurance, losses in transit, the crude oil quality differential and the costs of running the refinery.

4. A refiner in general selects the crude oil that gives the refinery the best margins. It does this by having access to all the necessary info in the market and then calculates the margin for every single crude oil because it knows what product slate each crude oil can produce.

5. But the refinery does not say it just wants the one with best margins. it provides the trader with a list of crude oils with quality differential that would need to be achieved on the other crude oil to equal the best crude margin. the trader then does his magic.

6. There are always alternates and it is always the one that provides the best margin overall that is bought.

Refiners rarely ever tell a trader to buy a specific crude oil because they could be leaving margin on the table and refineries are normally low margin businesses

7. Now if suddenly you are offered a crude oil at $65 that is not illegal to import and the cost of the alternate is $90. That is $25 straight to your margin. It does not matter if you are overpaying for freight. that is $25 dollarsto your bottom line no questions asked.

8. Too many theoretical Academics have focused on the actual price of the price cap without actually understanding how the oil market works. They completely forget the buyer and only focus on the seller. They completely forget about the alternate.

9. Refiners will pay $20 per barrel extra for freight if they are making an extra $25 dollars on their margins. The politicians in their price cap fixation completley forgot how the buyer (the refiner) works. It is why I said traders will get round the cap easily.

10. Russia can in theory keep its price of oil under the cap but charge massively on freight when they have ships available. It means Russia sells more crude oil at lower prices and gouges those when ships are open by selling it DES/DAP etc.

11. So Russia makes more money this way than just letting EU boats move Russian crude and providing insurance. I said from beginning that Russia will make more money with a price cap than would just leaving it to market forces. But those that have traded a barrel knew better