EU Faces Tight Schedule to Set Products Price Cap

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As a Feb. 5 deadline approaches, the European Union is facing a tight timeline to set a price cap on Russia's exports of refined oil products in coordination with the G7.

The topic could be discussed at a Jan. 25 meeting of EU ambassadors organized by current EU presidency holder Sweden, although it has not yet been confirmed that the products cap will be on the agenda.

Diplomats previously told Energy Intelligence that informal bilateral discussions among EU member states have been under way since late last year, and that there has also been engagement with non-EU members of the G7, such as the UK and the US.

US Treasury Department officials have been visiting EU member states to discuss price levels and potential impacts for key industries, as they did during the process to set the price cap for Russian crude exports which took effect on Dec. 5.

Complicated Mechanism

However, EU countries have not yet staked out firm positions about the appropriate level of the price cap for products.

The Polish climate and environment ministry told Energy Intelligence this week that "at present we do not know the precise date of talks" and that it was waiting for the European Commission's proposal on the "price cap level for products."

Like other member states, Poland said "the general assessment is that establishing the price cap on products may be more difficult from a technical point of view."

The price cap will coincide with an EU ban on imports of Russian products and the provision of shipping services.

It is intended to allow global trade in oil products to continue while also limiting revenues for Russia, by allowing G7 shipping services to be used for deliveries of Russian products to third countries, as long as deals are priced within the cap.

Since the Dec. 5 sanctions on Russian crude were imposed, most of the trade in Russian crude has moved to an alternative, non-G7 "shadow fleet" of tankers rather than using the price cap mechanism.

Nevertheless, Russia has been forced to offer deep price discounts to willing buyers, so the G7/EU objectives are being met, at least for the time being.

Implementing the price cap mechanism for products will be more complicated than for crude.

There will in fact be two prices caps from Feb. 5 — one for products like diesel that trade at a premium to benchmark Brent crude and another for heavier products like fuel oil that typically trade at a discount.

The caps will apply a fixed, f.o.b. price to a complex market in which floating, delivered prices are the norm. Product markets involve multiple grades, regional specifications and benchmarks, and less flexibility in the availability of suitable tankers.

Positions Still Awaited

EU diplomats have noted that reaching an agreement on a products price cap will be as hard, if not harder, than the earlier discussions on crude.

Diplomats from Poland and Lithuania, which both pushed hard for the lowest possible crude price cap, confirmed to Energy Intelligence that they have not yet adopted a final position on the caps for products.

However, the Polish ministry insisted that "coalition partners will find the compromise in order to ensure [the] reduction of Russia's revenues from [the] trade of oil products and at the same time supply the market."

In addition to agreeing price caps for products, the EU is also set to review the price cap for Russian crude exports, which was initially pegged at $60 per barrel just hours before it took effect on Dec. 5.

Poland and the smaller Baltic states argued in favor of setting the crude price cap at $30-$40/bbl to put Moscow under greater pressure, but they ultimately accepted the $60 level, which was negotiated down from an initial proposal of around $70.

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

EU Seaborne Loadings of Russian Crude Oil, Refined Products
('000 b/d)Jun'22Jul'22Aug'22Sep'22Oct'22Nov'22Dec'22Jan'23
Crude1,814 1,648 1,730 1,608 1,416 967 836 194 
Products1,115 1,187 926 603 880 1,412 1,100 994 
Diesel554 638 579 277 467 788 689 541 
Fuel Oil/VGO269 279 184 101 265 312 136 63 
Gasoline/Naphtha292 243 132 194 137 307 275 390 
Total2,929 2,835 2,656 2,211 2,296 2,379 1,936 1,188 
Note: Jan. 23 is first half of the month. Source: Kpler, Energy Intelligence

Oil Products, Sanctions, Ukraine Crisis
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