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Traders Downbeat on Russian Oil Price Cap

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Moves by the US and EU to impose a price cap on Russian oil exports have been met with widespread skepticism among the world’s top oil traders.

The bosses of Vitol, Trafigura and Gunvor told the Energy Intelligence Forum in London this week that the price cap — a US-led initiative designed to push down global oil prices and reduce the flow of cash into Moscow's coffers — lacks specifics and could in fact backfire by leading to higher prices.

Ben Harris, assistant secretary for Economic Policy at the US Treasury Department, explained to the forum on Oct. 5 that the rationale of the price cap would be to keep Russian barrels flowing, rather than restricting them. “The point of the price cap is to preserve the trade of Russian oil but at lower prices,” he said.

Harris was speaking at the same time as the EU was poised to introduce a new package of trade sanctions against Moscow that would include the price cap on Russian shipments of both crude and products.

The cap would be introduced as an addendum to existing EU sanctions that would allow purchasers and shippers of Russian barrels to continue using Western services such as insurance — as long as they agreed to buy at a certain price, Harris said. The cap on crude oil shipments would come into force on Dec. 5 and for oil products on Feb. 5, 2023 — the same dates as the EU embargoes are supposed to take effect.

Harris said the US had been discussing the idea with importers of Russian crude “in general,” but would not say what reaction he got from buyers in India and China, which are by a long stretch Russia's two main customers. So far, neither Beijing nor New Delhi has voiced support for the plan, on the basis that it interferes in the workings of the free market.

Serious Doubts

The leading oil traders who were speaking at the forum, and who were marketing as much as 2 million barrels per day of Russian crude and products before EU sanctions came into force this spring, remain unconvinced by the price cap plan.

“Everybody will be a bit cautious. There is a potential problem that we will actually shut in more oil than we expect,” Russell Hardy, the head of Vitol, the world’s largest independent oil trader, told the forum. He pointed out that sales of Russian oil are now being handled by little-known companies that have little understanding of how these new sanctions would work.

Ben Luckock, joint head of oil trading at Trafigura, voiced similar reservations. “It’s a well-intentioned idea and you can listen to Western governments and understand the logic, but I think we still don’t have real details on exactly how it will work,” he said. EU sanctions were already tricky to navigate and the price cap could just add to the confusion, he warned.

He also said the cap would be impractical if it were not supported by Russia. This is highly unlikely to happen, given that senior Russian officials say oil sales would be stopped to any countries that sign up to the cap.

Too Many Unknowns

The chairman and chief executive of Gunvor, Torbjorn Tornqvist, also said information was lacking about how the price cap would operate and doubted it would be effective. “There are so many unknowns here, I have a hard to time to see how it will work.”

Tornqvist said the cap would not affect current Russian exports flows, which are being directed largely to Asia, with Europe becoming less important as a market. “A lot of crude oil is going outside Europe. That will continue but they will just do more,” he told Energy Intelligence in an interview on the sidelines of the forum. “The routes are established and the infrastructure to deal with it is being built up.”

He also warned of a looming shortfall of diesel in Europe if Russia were to stop exports, which have been running at around 500,000 b/d and come from Baltic and Black Sea terminals. He said there was a potential for a major price spike this winter, as Europe has scant alternative sources of supply.

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

Topics:
Military Conflict, Ukraine Crisis, Crude Oil, Oil Prices, ENERGY INTELLIGENCE FORUM 2022
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