Details of G7 Oil Price Cap Start to Emerge

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Details are slowly emerging about the G7's planned price cap system that will set a maximum price for Russia's oil exports. Cargoes sold at the capped price will be allowed to sail on tankers that have Western insurance and finance.

The price cap will be set as a flat price for crude oil and refined products, with some product prices set at a premium to crude and some set at a discount to crude, according to delegates at the S&P Global Appec conference in Singapore.

Based on current prices, diesel and gasoline would be sold at a premium to crude oil while products like high-sulfur fuel oil or naphtha would trade at a discount to crude.

Several analysts said they expect the price cap for Russia's Urals crude grade to be set around $50 per barrel.

Once a purchase has been made under the system, buyers of Russian products or crude oil will not be allowed to resell them. The original buyer will have to use them, sources said.

Importantly, refiners who buy Russian crude outside the price cap system will not be subject to sanctions, according to the current design of the price cap.

Refiners in India and China are keen to buy more Russian crude, and preferably at steep discounts, but they want to avoid potential punishment, officials told Energy Intelligence in Singapore.

No Cheating!

The price cap system is designed to offset the impact of an EU shipping ban that will take effect alongside an EU ban on imports of Russian crude imports on Dec. 5. An EU ban of imports of Russian products will take effect on Feb. 5.

The shipping ban stipulates that vessels using insurance or financing from EU countries are not allowed to carry Russian crude or products.

EU and G7 countries provide insurance and finance to around 90% of the global fleet of oil tankers.

Oil bought under the price cap system would be allowed to sail on these tankers — a plan promoted by the US and adopted by the G7 to ensure that Russian oil keeps flowing to the global market, while limiting Moscow's income from oil sales.

It's unclear when the final wording of the price cap system will be published, but it is expected to stipulate that buyers must report the price they pay and that those who cheat on their paperwork will be penalized.

Oil traders have been urging policymakers from the G7 countries — the US, UK, Germany, France, Italy, Canada and Japan — to hurry up and present details of the pricing system.

That's because Asia is starting the December trading cycle for crude cargoes loaded in the Middle East.

The US will issue regulations that incorporate the price cap, while the EU will take steps to ensure that similar rules are adopted by its member countries. Other G7 countries will take similar steps to implement the price cap in national regulations.

Cheaper Oil

The intention behind the G7 price cap is to allow developing countries to benefit from the lower price that Russian crude is expected to trade at.

US Deputy Assistant Treasury Secretary Catherine Wolfram told the Appec forum that this means that EU and G7 countries will not import Russian oil, even if it is sold in compliance with the price cap.

“We will not be the beneficiaries of cheaper oil," Wolfram said.

From December, Russia will need to find a market for around 1.2 million barrels per day of crude oil that is still flowing to EU countries, and from February it will have to find a new home for 1 million b/d of refined products.

Refiners say both India and China can absorb more crude, but it's unclear what their limits are. Refiners say India could take perhaps as much as 600,000 b/d more, while China could use cheap Urals crude to increase its refinery throughput.

But oil traders and shippers say the world does not have enough vessels to ship all of Russia's oil to long-haul destinations outside Europe.

Russell Hardy, CEO of international trader Vitol, suggested during the Appec conference that it might therefore be wise to allow sales of Russian oil into Europe to continue under the price cap system, to avoid an overall dip in global supply.

Traders fear that roughly half of the Russian oil that needs to be redirected away from Europe could be stranded in Russia if India, China and others don't absorb it.

The crude market could probably offset such losses, but the products market could not, with supplies of diesel in particular running tight.

Substantial Transformation

Wolfram told Energy Intelligence on the sidelines of the conference that the price cap will be applied to Russian oil until it has undergone a "substantial transformation."

Russian crude or oil products that are blended in onshore tanks or offshore tankers would not be considered to have been transformed substantially, and so the price cap would still apply to the resulting blends, Wolfram said.

"The price caps could well end up being leaky. When it comes to enforcement, the US would seek to penalize companies that seek to evade the price by falsifying documents," Wolfram said.

"But the US government would not go after entities that unwittingly end up in the possession of fake documents," she added.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact

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