G7 claims success with price cap keeping Russian oil flowing

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When G7 leaders prepared to introduce a price cap for Russian oil last summer, some industry veterans questioned whether the complex system would work. A year later, Western officials believe they have largely proved them right: The Kremlin’s revenues are down but its oil is still flowing.

The price cap on Russian crude and refined oil products was engineered by the United States in response to a planned EU ban on European companies providing shipping, or other maritime services, to Russian oil cargoes.

By allowing these companies to continue servicing Russian cargoes if oil is sold at a discount, Washington hoped to reduce Kremlin revenues while ensuring Russian exports would continue, to protect a global economy grappling with high costs. energetic.

US officials felt they had “silenced the skeptics” by keeping Russian oil flowing, says Helima Croft, a former CIA analyst and now head of commodities research at RBC Capital Markets.

“If we never had a ban on services, we never would have had price caps,” Croft explains. “The goal was to keep the molecules on the market.”

Russian oil exports reached 8.3 million bpd in April, the most since April 2020, driven largely by China and India, which imported 2.1 million bpd and 2 million bpd respectively per day of Russian crude oil, according to the International Energy Agency (IEA).

At the same time, monthly Russian oil export revenues fell 27% year-on-year to $15 billion, according to IEA estimates. In response, Russian President Vladimir Putin last month changed the way the Kremlin taxes its oil companies, to a levy based on the price of Brent crude less a fixed discount, rather than the much lower Ural price. , the country ‘s main crude export blend .

A member of the G7-led coalition described the passage of Russian taxes to the FT as “prima facie evidence” that the country’s revenues were suffering from the cap.

However, the full story of the cork’s impact is more complicated. Western restrictions were supposed to reduce Russian revenues by limiting the price buyers could pay for Russian crude and diesel to $60 and $100 a barrel, respectively. In fact, in January, the first full month of restrictions on Russian crude, the average quoted price of Ural fell to $49/b, significantly below both the cap and the average price of the international benchmark Brent, which was $82 /b.

However, traders say the discount for Russian crude that widened in December and January was a reflection of new non-Western buyers using G7 restrictions to drive prices down, rather than Western buyers abiding by the limit. Now that Russia has formalized more ways to get its oil to new customers without using European shipping or insurance that must meet caps, Russian crude prices have started to recover.

The IEA calculated last month that the weighted average export price of Russian crude had risen above its price high of $60/b in April, with a crude sold in Russia’s far east, known as an ESPO-blend , sold for up to $74/b.

In this way, some critics argue that the sanctions and associated price caps have simply pushed most of Russia’s oil trade into the shadows: shifting it from well-known global shipping and trading companies to lesser-known and less experienced new entrants. In response, the US Treasury issued a warning last month, warning of possible evasion of the price cap for Russian oil, especially with regards to exports of the ESPO blend.

“Some token targeted prosecutions” to serve as a “warning” to any US or European company involved in such trading are a possibility, Croft says.

However, any major changes to the price cap mechanism are unlikely, he adds. “I don’t hear, at least in Washington, a lot of hand-wringing about the money Putin is making on oil,” he says. “I think they point to the volumes and say we avoided an energy crisis with this policy.”

The price of Brent has fallen about 10% since the crude oil price cap was introduced on Dec. 5. Jorge León, senior vice president at Rystad Energy Analysts, says the G7 is unlikely to lower the price cap to compensate for that decline. “They could lower the price cap more but the more you reduce it, the more likely you are to see an unintended reaction from Russia, for example stopping production, which would greatly increase the price,” he says. “It’s a nice calculation [for the G7].”

An alternative could be to target refineries in countries like India that process large volumes of discounted Russian crude into fuel, some of which is then shipped back to Europe. But while some EU officials have expressed concern about Europe’s continued purchases of such products, any action to block imports would risk disrupting Russian exports and driving up prices, says Amrita Sen, research director at Energy Aspects consultants. “So far, the sanctions have been designed to keep the oil flowing and they have not been designed to ‘hurt’ Russia,” she says.