Analysis-As the clock ticks on Russia’s G7 oil price cap, big questions remain By Reuters

0
2/2

© Reuters. FILE PHOTO: The Minerva Virgo tanker, moored at the oil terminal, is seen after leaving a Russian port around the time that country invaded Ukraine in late February, since US President Joe Biden banned March 8 russian energy import, gi

2/2

By Andrea Shalal and Timothy Gardner

WASHINGTON (Reuters) – Just a month before wealthy Group of Seven nations plan to cap the price of Russian oil, officials are rushing to finalize details, leaving traders, shippers and insurers with questions about the level prices and how it works.

Officials from the United States and its G7 allies plan to cap prices on oil shipments by sea starting Dec. 5, with a second cap on petroleum products on Feb. 5.

The unprecedented price cap aims to prevent Russia from profiting from high oil after its February 24 invasion of Ukraine, while ensuring that the bulk of Russian oil continues to flow to global energy markets. .

India and China have bought Russian oil at a deep discount, and G7 officials hope they will use the cap to negotiate lower prices with Moscow.

Russian President Vladimir Putin has said he will stop exporting oil to countries that enforce the cap, and even if he doesn’t, his threat could help prop up oil prices.

Here are the known and unknown so far:

WHO IS PART OF THE PRICE CAP COALITION?

The wealthy G7 nations, the United States, Japan, Germany, Britain, France, Italy and Canada, are developing the plan with the EU and Australia.

Last month, Yellen said G7 members were not looking to expand the coalition because none of the countries outside were a major provider of oil-related insurance or financial services.

Britain said on Thursday it could ban countries from using its services to transport Russian oil purchased at a price above the cap.

US Treasury Assistant Secretary for Economic Policy Ben Harris said on September 9 that if China negotiated a separate 30-40% discount on Russian oil due to the price cap, “we consider that to be a victory “.

WHAT WILL THE PRICE CAPACITY LEVEL BE?

It will likely be weeks before the price level of the caps is decided, government officials and analysts said.

A person familiar with the process said the cap will be determined in line with the historical average of $63 to $64 a barrel, suggesting a natural upper bound.

Currently, the price of Russian crude is below the international benchmark and the G7 wants this reduction to be as large as possible to limit Russian oil revenues. Still, demanding too wide a spread could have the unintended consequence of squeezing global supplies, as Russia is the world’s second largest exporter of crude, after Saudi Arabia. This could increase fuel prices for Western consumers.

Hoping to prevent that, coalition officials have agreed to set a fixed price when they finalize a price cap on Russian oil later this month, rather than adopt a floating rate, sources said Thursday.

Consensus on the level of the cap will be reached with the help of a “rotating principal coordinator”, the US Treasury said.

HOW DOES THIS AFFECT SHIPPING COMPANIES?

The plan calls on participating countries to deny Western-dominated oil transport services like insurance, finance, brokerage and shipping to oil cargoes priced above the ceiling.

Oil buyers should declare that they have purchased Russian oil at or below the cap.

Shipping service providers will not be held liable for false price information provided by buyers and sellers of Russian oil, the US Treasury said.

G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs insures about 95% of the world’s tanker fleet.

HOW COULD RUSSIA FIGHT BACK?

Putin has pledged to cut exports to countries that participate in the cap, but he also needs oil revenues to help fund Moscow’s war efforts.

Industry players estimate that 80-90% of Russian oil can exit the cap mechanism using Russian and non-Western vessels and insurance.

In October, JP Morgan estimated that Russia lacked about 1 million barrels of daily crude oil tanker capacity and 2.5 million barrels of fuel capacity. Moscow could end up cutting production, putting upward pressure on global oil prices. Prices could rise even as traders fear Putin will halt exports.

Some analysts say Moscow could also withhold oil from Russian assets in other producing countries such as Libya and Iraq.

HOW WILL THE CAP BE ENFORCED?

The plan lacks a centralized enforcement mechanism, leaving countries implementing the cap to apply penalties for purchases over the cap.

The US Treasury has warned service companies to watch for potential evasion or fraud by Russian oil buyers. These may include evidence of deceptive shipping practices, refusal to provide requested pricing information, or excessively high service costs.

Anyone who falsifies documents or otherwise conceals the true origin or price of Russian oil would face consequences under the domestic law of jurisdictions implementing the price cap, the Treasury said.

The coalition has agreed that the price cap will apply to the first landed sale of oil transported by sea, or when the oil is unloaded from a ship to a tank ashore. That means any intermediate trade while oil is offshore must be at or below the cap, a Western source said on Friday.

Some industry players are concerned that tanker owners could face penalties, noting that the United States has no mechanism to determine what due diligence has been undertaken.

Worries about potential sanctions, even if unfounded, may cause traders to avoid deals, another factor that could drive oil prices higher.

Share.

Comments are closed.