Talk of High Russian Price Cap Eases Fears of Disruption

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EU discussions around a high G7 price cap on Russian oil exports are being viewed as bearish for oil markets.

The EU continued Thursday to try to reach a consensus on the level for the planned G7 cap, with a proposal to set it in a $65-$70 per barrel range criticized by different countries as either too high or too low.

But market reactions were that the high proposed price should be good for supply.

“With the currently discussed price level above the price of Russian crude, Russian oil will continue to flow, but also Russian oil export revenues will not be curbed,” commodity analyst Giovanni Staunovo at Swiss bank UBS, told Energy Intelligence.

Official Russian data shows that the current discount for Urals crude to benchmark Brent is $22-$23. With Brent currently trading around $85, this implies a value of roughly $60-$65 for Urals — slightly below the range initially proposed in EU discussions this week.

The cap aims to allow Russian exports to continue flowing, while capping Moscow’s revenues for the war in Ukraine.

Negotiations are going down to the wire, with the price cap on Russian crude to apply from Dec. 5, when the EU embargo on Russian crude imports takes effect, and on Russian oil products from Feb. 5.

In parallel, companies in the G7 group of countries plus Australia will be barred from providing services to Russian oil shipments unless cargoes are priced under the cap.

Moscow's stated position is that it will not comply with the price cap, and that supply will suffer — although it hinted on Thursday that it could review this position.

China Dismissive

China and India have emerged as the top destinations for cheap Russian crude. Chinese sources are dismissive of the cap, with a government energy analyst calling it “useless” and a crude trader with a state-run refinery saying it would have “no impact” on China’s crude imports.

India’s largest refiner, the state-owned Indian Oil Corp. (IOC), has said it suspended orders for Russian crude delivery beyond Dec. 5 as it waits for clarity on the cap. A senior IOC executive said Russian crude made up only a "miniscule" percentage of its total imports. But other state-owned refineries have also expressed concerns about Russian imports amid rising risk and uncertainty.

If the cap were set at $65-$70/bbl, there should still be plenty of crude around, says a London-based crude trader. “[Mideast] crude will be in surplus, which flows into Europe, then North Sea, Caspian and West African crude should be cheaper. It’s all related,” the trader said.

Splits in Europe

Differences have emerged this week between EU member states over the level to cap prices at, with Baltic countries Poland, Estonia and Lithuania understood to be seeking a cap as low as $30/bbl, arguing that the higher proposal would guarantee far too much revenue for Russia and make the entire exercise pointless.

Meanwhile, Greece, Cyprus and Malta, countries with big shipping industries, have called for a higher cap than $65-$70/bbl, arguing that even at those levels they will lose business.

The price cap idea emerged mainly in response to concerns, particularly in the US, that the shipping ban would severely disrupt global oil trade, spiking prices and harming Western economies.

Officials have described it as a kind of safety valve that prevents the EU ban from causing havoc in the markets.

“Brussels passed sanctions in June that the market probably can't accommodate,” Ben Cahill, a senior energy fellow at the Center for Strategic and International Studies in Washington, wrote on Twitter.

“If the G7 set the price cap much lower it would create a huge arbitrage opportunity: temptation for market players to cheat to access cheaper Russian oil. G7 might be trying to avoid this.”

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

Oil Supply, Oil Demand, Sanctions, Oil Tankers, Ukraine Crisis
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