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EU Agrees $60 Price Cap on Russian Oil

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The EU has agreed a long-awaited $60 per barrel price cap on Russian oil exports after Poland dropped its insistence on a lower cap. The legislation will likely be published this weekend ahead of the planned implementation on Dec. 5 of a G7-wide cap that includes the US and UK.

Poland, Lithuania and Estonia have been trying to push the price lower to limit Russia's oil export revenues as much as possible and were holding out on a price range of $65-$70/bbl that was first proposed last week.

The other holdout group, composed of Greece, Cyprus and Malta, had sought a higher price level and protections for their shipping industries.

Following the EU agreement, the G7 and Australia finalized the coalition-wide cap at $60. The group of countries in the coalition also plans to announce a cap for refined products ahead of a Feb. 5 deadline.

US Treasury Secretary Janet Yellen said Friday the cap would “help further constrain [Russian President Vladimir] Putin’s finances and limit the revenues he’s using to fund his brutal invasion.”

Baltic Hardline

“Crippling Russia’s energy revenues is at the core of stopping Russia’s war machine,” Estonian Prime Minister Kaja Kallas said in a statement Friday, showing the importance the Baltic state placed on price cap talks. “Every dollar counts,” she said, adding that the war was an “existential matter to us”.

The initial EU-wide proposal was to set the price at $65 per barrel but this was lowered to $60/bbl, Kallas said. “It is no secret that we wanted the price to be lower.”

Estonia confirmed it had sought a level between $30-$40 but had to accept the best compromise it could get. Both Poland and Lithuania had sought a similar aim.

A Polish official said Warsaw “welcomed the compromise,” declining to comment on why a $60/bbl cap was acceptable. The official confirmed that Warsaw had held off on approving the deal, "wanting to closely examine" the mechanism.

Talinn also said it had proposed a review to adjust the price on a regular basis aimed at reducing Russian revenues. The price ceiling should be at least 5% below the average market price for oil with a first review due in mid-January.

A US official said this week that the price could be reviewed as frequently as bimonthly.

Ninth Sanction Package

The agreement allows the EU to advance its ninth package of sanctions. The EU has launched a written procedure for all 27 EU countries to formally approve the deal and these will be published in the EU’s legal journal this Sunday Dec. 4.

The G7 has pitched the oil price cap as a tool to limit Russia's oil revenues and make it more difficult for Moscow to fund its war in Ukraine.

At the same time, the cap is supposed to keep Russian oil flowing into the global market to avoid shortages and price spikes.

The EU is banning seaborne imports of Russian crude oil from Dec. 5 and is also prohibiting its companies from providing shipping services for exports of Russian oil to third countries from Dec. 5.

Exemptions to the ban on shipping services would be granted if Russian oil is purchased at or below the price cap.

Ahead of the agreement this week Russia said it did not care about the level of the cap and would consult its partners directly. It “would not look at those ceilings and won’t give any guarantees to [those] who illegally introduce those caps,” Russian Foreign Minister Sergei Lavrov told a press conference in Moscow on Dec. 1.

Industry Skepticism

Oil market players have already said they are uncertain how effective a price cap will prove to be. Multiple traders consulted by Energy Intelligence have said it is unclear how they will comply with the cap because oil trades are typically priced as a differential to a benchmark, rather than at a fixed price.

Shipping, insurance and other related services are generally arranged before the actual price is set relative to a benchmark around the date of loading or delivery.

There has also been skepticism that the G7 effort will be able to stem the flow of Russian oil priced below the cap, given Moscow’s efforts to establish its own shipping and insurance network.

Washington is trying to downplay the extent to which that undermines western goals, saying that establishing those services eats into Russia’s oil revenue – the ultimate goal of the cap.

“If Russia wants to build up their own ecosystem and spend the money on boats and on trying to build something that Western countries have built over decades, and then go and try and sell that oil to countries that are also going to require huge discount, then they should continue to do that,” a US Treasury official said Friday. The official also downplayed the credibility of Russian insurance, arguing purchasers may push for additional discounts if forced to use it.

Topics:
Oil Supply, Crude Oil, Sanctions, Oil Prices, Oil Trade
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