Russia Price Cap Plan Bemuses Market Players

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Details on a proposed cap on Russian crude and refined product prices have yet to emerge, but the oil market is already expressing deep skepticism as to how such a policy could be implemented or even designed. Many oil traders, analysts and others say they do not believe a cap would be workable, and are divided as to how it could function. The US and EU are promoting the concept of a price cap in an attempt to constrict Russian revenues without starving the global oil market of supplies, through linkage to insurance or other services. Talk so far has focused on a flat price cap, barring buyers from paying Russia above a certain level, although there has been some market conjecture about a mandatory discount to a benchmark crude such as Brent. A flat price cap would represent a novel concept for oil markets, where oil trades off various benchmarks. Either approach would be complicated. Market players raise several immediate questions: Who would set the cap, and given market volatility, over what period? How could traders hedge against pricing risk if Russian oil is decoupled from the global market? In addition, Russian crude — and Urals in particular — is sensitive to time spreads. Backwardation in the forward curve — the extent to which prompt prices are higher than forward ones — tends to inform Urals’ destination. A fixed price would remove that flexibility.

Oil Products, Crude Oil, Oil Trade, Sanctions, Ukraine Crisis
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