Updated December 9, 2022
What happened
The G7 nations, along with the European Union, implemented a price cap of $60/Bbl on Russian crude on Monday, December 5. The cap means that Russia can only export crude oil, ship it, and insure it using the services of companies from G7/EU if it sells it for $60/Bbl or less.
The price cap would change how those countries could buy Russian crude. An earlier global embargo, still in effect, prohibits shipping and insurance services. It went into effect on Dec 5 and included an almost total ban on importing Russian seaborne crude into the bloc.
However, the price cap policy is intended to keep Russian crude flowing into the international market while cutting Russia's oil revenues.
Starting mid-January, the cap policy will be reviewed every two months. The cap could be reset, but at least 5% below average market rates. Every change must get the unanimous approval of all EU members.
Repercussions
According to Bloomberg, two officials familiar with the plan said that Moscow is considering setting a fixed price floor for its international oil sales or setting maximum discounts to international benchmarks at which they can be sold. However, Russia has said many times that it will not sell to those who partake in the price-cap mechanism.
AEGIS notes that either way, it raises the possibility of a decline in Russian production. Some analysts expect a loss of 0.5 – 1.5 MMBbl/d of Russian production.
How other nations are responding to the price cap?
India and China alone imported nearly two-thirds of Russia's seaborne crude exports in November ahead of the EU's Dec 5 Russian crude import ban and G7's price cap. They might continue to do so.
Nations that are not participating in the price cap are free to carry on negotiating deals with Russian companies. If those transactions are completed at less than $60/Bbl, the crude can be carried on European ships, insured internationally, and supported by European banks, brokers, and other service providers.
What's next?
AEGIS believes that recent moves by OPEC and its Russian-led allies to keep production quotas unchanged, as well as Western governments' $60/Bbl price cap on Russian crude, will keep global supplies tight.
Additionally, given that Russian oil's primary export grade is now trading below $60/Bbl – because of discounts already traded in the open market – the G7 price cap may not initially have much of an impact on further reducing the country's oil export flows.
While Russia has said it has no plans to sell its crude or oil products under the price cap mechanism, US officials have said the price cap is intended to cheapen the value of Moscow's key revenue source outside the G7 by giving refiners in China and India more leverage to negotiate steeper discounts.
Next up: a refined-products ban. The European Union's ban on Russian refined oil products starts on February 5. To keep up with our analysis of that issue and others, sign up for First Look.
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