A US-led move aimed at lowering prices, not supplying Russia’s vital oil exports
Control of global tanker insurance is key to enforcing the price cap
EU still discussing adopting price cap in existing Russian oil sanctions
As the G7 group of wealthy nations continues to hammer out the fine print of a price cap mechanism on Russian crude and product exports, oil markets and shippers have to guess how and when the measures will be structured. , implemented, monitored and enforced.
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Designed to keep Russian oil flowing to world markets while limiting Moscow’s ability to finance its war in Ukraine, the United States hopes the price cap will be agreed at least a month before the sanctions of the EU only come into force on December 5 and February 5 for crude. and products, respectively. As expected, the price cap would prohibit shippers, insurers and insurance brokers from compliant countries from providing services to oil buyers from other countries trading Russian oil above a specified price level.
“The price cap proposed by the United States continues to gain momentum,” said Paul Sheldon, chief geopolitical adviser at S&P Global Commodity Insights. “Our baseline assumes a complicated application process and the need for Russia to voluntarily sell into the cap would mitigate the desired impact of keeping more oil in the market, at least initially.”
The following is a roundup of key market moves and implications for price cap plans so far:
The value of Russia’s flagship export-grade crude oil, the Urals, fell following the war in Ukraine, reaching record highs of $40/bar below physical Dated Brent as many Western buyers shunned Moscow oil. But discounts for the Urals began to taper sharply in August as global supplies tightened and China and India increased their imports of cheap Russian oil. The narrowing spread for Russian crude supported Moscow’s oil revenues even as benchmark oil prices retreated from June highs. Some market watchers see the renewed impetus given to the G7 price cap initiative as a direct response to the reduction in Russian crude discounts.
- The United States said it does not expect or need key importers such as China, India and Turkey to join the G7 price cap, but hopes the he impact of the mechanism on trade flows and its use as a bargaining lever to negotiate cheaper Russian oil will drive the value down. Russian crudes in the world.
- Indeed, Urals crude’s discount to dated Brent stood at $23.19/bbl on September 27, according to data from S&P Global Platts, after widening $3/bbl from to a post-war low of $19.05/bbl on August 25.
US Treasury officials said the proposal seeks to set three separate price caps for imports of Russian crude and higher and lower value petroleum products such as jet fuel and fuel oil.
- According to US officials, price caps that have yet to be decided will be set between the marginal cost of production of Russian oil and pre-pandemic Russian oil prices on the world market in order to induce Russia to continue to produce and export.
- Seven of 11 major Asian refiners and trading firms surveyed by S&P Global Commodity Insights forecast the ceiling for Russian crude to be around $48/bbl to $55/bbl.
- Several Southeast Asian refiners, including Pertamina, have said they are tempted to buy Russian sweet crudes from the Far East, including ESPO and Sokol, but that will depend on Russia’s willingness to accept. the price cap.
- Many Asian buyers, especially in India and China, have purchased Russian cargo due to steep discounts, and tanker tariffs from Russia remain at high levels.
- Dirty Black Sea to Far East shipping route for 135,000 tons cargo remained more than double pre-war levels at $43.70/ton on September 27, according to Platts valuation .
Before the war, 60% of European diesel imports came from Russia, a dependency that rises to 70% for North-West Europe, while in the Mediterranean, 25% of diesel imports came from Russia, according to the supplier of Kpler tanker tracking data. Russian oil exports by sea fell 6% to a new low after the Ukrainian war in the first half of September, according to Kpler. As Russian volumes plummet ahead of sanctions, growing US imports mean the United States is set to become Europe’s biggest oil supplier in the coming months.
- The G7 estimates that approximately 95% of the world’s tanker fleet is covered by marine insurers in the G7 countries, namely Canada, France, Germany, Italy, Japan, the United Kingdom and United States.
- Marine insurers in all EU member states are also expected to implement the cap once finalized.
- Russia has said it will not sell oil or products to countries imposing the price cap mechanism on its exports.
- Some analysts fear that Russia will retaliate further by shutting down swaths of its production to trigger a rise in global oil prices.
- However, most market watchers believe that Russia will be able to maintain its oil revenues and not jeopardize its share of the global oil market.
Some oil supply losses from Russia are considered likely even if the EU reworks its existing sanctions to incorporate the price cap mechanism before the end of the year.
- S&P Global Commodity Insights expects Russian disruptions to peak at 1.5m bpd in Q1 2023 due to EU import bans, which may be tempered by price caps.
- Goldman Sachs estimates the world can expect to lose around 1m bpd of Russian supply from pre-war levels due to incomplete redirection to other non-NATO buyers under a price cap.
Oil importers, refiners and traders looking to buy Russian crudes after December will struggle to access G7 financing and insurance services. Europe is heavily dependent on Russian oil, which means it will take time to diversify supply, but new dynamics are emerging.
- European imports of Russian crude by sea were about 1 million barrels per day below pre-war levels, at just under 1 million barrels per day in the first half of September , according to data from Kpler.
- The EU has said it is considering incorporating the G7 price cap into its existing sanctions on Russian oil imports which are due to come into effect from December 5. The trading bloc needs the unanimous support of all 27 members to implement the price cap.
- If approved, the EU would have to create an exception to its services ban for Russian maritime oil, thereby banning imports of Russian oil unless the oil is purchased at or below the ceiling price.
- “Even so, several headwinds would persist,” Sheldon said. “These include opaque pricing for many transactions, confusion over implementation and enforcement details, and the need for Russia to voluntarily engage under EU-induced constraints. However, if the alternative is to stop production, the United States does not move on to threats of secondary sanctions, and the cap is set at $60/b, over time, Russia and some Remaining buyers may choose to use the option to receive Western shipping services under the “price exception” policy.
With the main leverage of the price cap directed towards the provision of insurance for shipping tankers in compliant countries, market watchers expect some buyers of Russian crude to use a growing source of oil services. alternative insurance offered in Russia and China.
- Russia’s ability to circumvent the price cap by using domestic or non-G7 regulated marine and oil insurance from countries not imposing the price cap is, however, considered limited due to a shortage of capacity. tanker reserves.
- The Druzhba pipeline – which transported up to 1 million b/d of Russian crude from the Urals to central Europe before the war – remains a supply route for Russian oil to some European refiners. Ukraine ships Russian oil to Slovakia, Hungary and the Czech Republic via the southern branch of the Druzhba line.
- But flows via this route will decline further by the end of the year as Germany halts imports to comply with EU sanctions.
- Germany and Poland are preparing to end their imports via the northern Druzhba route by the end of 2022 despite the exemption from sanctions for pipeline flows.
- Some 300,000 bpd of remaining Russian crude could continue to flow to Hungary, Slovakia and the Czech Republic, which are exempt from the ban.
- Bulgaria, which imports Russian crude via the Black Sea to supply the 190,000 bpd Neftokhim refinery owned by Lukoil in Burgas, is allowed to buy Russian crude for another two years until December 2024.
- However, these remaining Russian flows to the EU could still be subject to price caps if the EU adopts the G7 proposal.