G-7 Oil Price Cap at $60/bbl won't hurt Russia

[dan_s]

The G-7 Oil Price Cap Looks Set to Keep Russian Oil Flowing < Europe knows they are totally screwed without Russian oil.
2022-12-02 18:06:34.810 GMT

By Ewa Krukowska and Alberto Nardelli
(Bloomberg) -- The Group of Seven is set to impose a price
cap on Russian oil that’s well above where it now trades. If
there was ever any doubt what the premise of the cap was, it’s
now clear: the US and its allies want Russia’s crude to keep
flowing.
European Union ambassadors backed limiting the price of
Russian oil, a key source of income for President Vladimir
Putin’s war machine, at $60 a barrel after fraught talks that
dragged into the night more than once. Crucially, that’s above
the $50 that Russia’s flagship Urals grade already trades at,
according to data from Argus Media.
“The key point in our view is the signal that the G-7 seeks
to keep Russian oil on the market,” said Joel Hancock, an
analyst at Natixis. “The market has shifted to a view that
Russian crude oil exports will remain more resilient than
previously expected and largely unaffected by the price cap.”
Now, Moscow’s reaction will be key. Russia has opposed the
measure, and threatened to stop production in response. But on
Thursday Russian Foreign Minister Sergei Lavrov said the cap was
irrelevant, the strongest hint yet of a possible softening. With
such a generous cap, buyers and sellers can easily claim it’s
just business as usual.
“We don’t care what the price cap will be. We’ll negotiate
with our partners directly,” Lavrov said. “And partners who
continue working with us won’t look at those caps.”
The G-7 has mostly decided to stop its own imports of
Russian crude so the move is aimed squarely at other big buyers
such as China, India and Turkey. Those countries have not signed
up, but the US hopes they will use the threshold as a bargaining
chip. Crucially, if they don’t buy below the threshold, they
won’t be able to access European insurance and shipping.
The plan, driven by the G-7, comes at a time when Europe is
fighting high inflation and at risk of a recession. Companies
and households are reeling from exorbitant energy bills
triggered by Russia’s invasion of Ukraine, and the OPEC+
alliance is keeping a tight rein on supply. As governments spend
billions to stave off a backlash from voters, increased economic
risks are now being taken into account in political decision-
making.
Europe Sets Russian Oil at $60 a Barrel: What Changes Now
The EU sanctions agreed earlier this year had initially
shocked many in the market for being so strict. The idea was to
ban companies from providing insurance to transport Russian oil
anywhere in the world. It would have meant even Chinese and
Indian customers would have had to find their own insurance from
Dec. 5.
The US argued that the sanctions risked provoking a spike
in oil prices that would have been ruinous for the world
economy, and also potentially end up even benefiting Putin. The
price cap was a kind of off-ramp -- those services would be
available but only for oil sold under the designated level. The
idea was to limit revenues but keep the oil flowing to the
global economy.
Some in Europe saw the US plan as a way to water down
sanctions, and Poland led a group of countries pushing for the
cap to be closer to production costs. Shipping nations wanted a
more generous level, and the discussions were often fraught as
countries’ interests didn’t always align.
For its part, Ukraine said the level should be set as low
as $30.

First Doubts

“Given that Urals is currently traded far below the level
of the cap, in principle it could be a good deal,” said Jorge
Leon at Rystad Energy.
A complicating factor is that oil is priced very
differently in Asia. There, the key ESPO grade is trading at
over $70 a barrel. It’s not clear if all that crude will end up
under the cap or not.
When the price cap was first floated as an idea, many
thought it unworkable without key buyers such as India and
Turkey on board, or extraterritorial penalties to deter breaches
and incentivize adoption.
Now it looks like the US can claim some kind of victory if
Russia does sell under the ceiling. Washington also argues that
if Russian oil is already trading at a deep discount, the threat
of the price cap can take some of the credit. For its part,
Poland, after long negotiations, has secured some extra
conditions, including a review mechanism going into next year.
Kaja Kallas
@kajakallas

Every dollar counts.

Every dollar negotiated down = ca $2 billions less for Russia.

Going from $65 per barrel to $60 = 10 billion dollars less for
Russia to finance its genocidal war against Ukrainians. 2/
Sent via Twitter for Android.
View original tweet.
Still, there remain questions over enforcement, as the EU
has watered down its rules, and there are no secondary sanctions
to add teeth. A spat over insurance in Turkey could still pose
problems. And the Kremlin’s reaction remains a big unknown.
“There’s so much uncertainty really over just how much
physical disruption we’ll see to Russian crude supplies,” Neil
Beveridge, senior oil analyst at Sanford C. Bernstein, said in a
Bloomberg television interview.
Price Cap on Russian Oil Risks Crisis It’s Meant to Prevent