ANALYSIS-G7 Russian oil price cap moves from revenue squeeze to market anchor


By David Lawder and Timothy Gardner

WASHINGTON, December 6 (Reuters)When U.S. officials first floated the idea of ​​capping Russian oil export prices in response to a planned European embargo in March, they committed to reduce revenues for the Russian war machine, while avoiding a devastating spike in oil prices.

But keeping Russian oil on the market and global prices low quickly became the biggest priority as oil prices surged, people familiar with the shifting mechanism and energy analysts said.

The $60-a-barrel price limit on maritime crude imposed by the G7 democracies and Australia on Monday bears this out, aligning with current market prices.

Analysts said the cap will have little immediate impact on the oil revenues that Moscow currently earns. Russia said monday the cap would not affect funding for its “special military operation” in Ukraine.

The price cap is “an unfortunate compromise that will do little to reduce Russia’s oil revenues” from current levels, said Ben Cahill, an energy security expert at the Center for Strategic and International Studies in Washington.

“I really think the main objective of the US Treasury was to defuse the EUtransport, insurance and service bans that are part of the sanctions on Russian oil exports,” said Cahill.

Russian Urals blends crude for delivery to Europe URL-NWE-EURL-E was listed at an average price of $55.97 on Tuesday, below the cap and down from $61.35 on Sunday.

The reference price of Brent LCOc1 slid towards his lowest since january below $80 on Tuesday, extending a downtrend as rising global demand concerns offset any bullish effect the price cap on Russian oil sales.

US Treasury officials, the engine of the G7 price cap, sought to weigh fairly reduce Russia’s revenue and maintain supply, although market prices have at times influenced this, a senior Treasury official told Reuters.

“There have been times when Brent has fluctuated wildly over the past eight months where we worried about each other, but in general we created these two goals that have equal importance.

The official said the price cap “institutionalises” current market discounts, arguing that the cap plans were responsible for lower oil prices in recent months.

Analysts also attribute lower global oil prices to the weakening global economy, COVID-19 lockdowns in China and the OPEC+ group’s decision to keep production stable.

PRICE, FALL IN RUSSIAN REVENUES

That’s far less than the more than $21 billion a month Moscow earned in June, according to a estimate from the International Energy Agency (IEA), as Brent rose above $120.

At current oil price cap levels, Russia is earning roughly the same amount as before talk of an invasion of Ukraine started driving prices up. Russia earned about $15 billion in June and July 2021, before Russian troop buildups near Ukraine.

The price cap level of $60 agreed Friday after a fierce debate. Poland, Lithuania and Estonia argued that European Union countries should push for the cap to be as low as $30, closer to Russia’s cost of production, after an initial proposal of $65-70.

FUTURE CASH FLOWS

As crude prices have fallen, the language surrounding price caps by U.S. officials has shifted from “cutting” Russia’s revenue to “limiting” future cash flow.

US Treasury Undersecretary Wally Adeyemo told the NEXT conference in New York on Thursday that the cap “will lead to Russia earning less income in the future and having less money to invest in waging war.”

“The key thing to remember is that we start at $60, but we have the ability to … use the price cap more to limit Russia’s revenue over time,” Adeyemo said.

In July, Adeyemo said the goal was to eliminate the “risk premium”, or price increase that Russia had introduced into the

oil market with its invasion of Ukraine, to give Moscow less money to “pay for its war machine”.

If Moscow succeeds threats to reduce production rather than sell oil to countries respecting the cap, prices could shoot up upper, and this is where it could get tricky for the US and G7 allies.

US officials “want to avoid this at all costs,” said Yawger of Mizuho, ​​adding that it could mean that “suddenly support for Ukraine starts to dry up.”

AVOIDED PRICE HOOK

Oil markets have evolved considerably since Russia’s invasion of Ukraine on Feb. 24 pushed prices up.

Treasury internal estimates at that time had shown that world crude oil prices could exceed $150 with the EU embargo in place and no mitigation measures.

And with the OUCH predict that oil markets could lose 3 million Russian barrels by day if the toughest EU sanctions are imposed, Barclays and Rystad Energy warned that oil could reach $200.

The Treasury’s “real motivation after March was mainly to preserve Russian flows in the face of EU sanctions, which they don’t think is a good idea.” said a source familiar with the Biden administration discussions.

“They thought that if there was a spike in oil prices, not only would it hurt us economically and politically, but it would hurt Western support for Ukraine,” he added. in his fight against the Russian army.

As the G7 hammered out the plan, India and China grabbed the heavily discounted Russian oil and are expected continue large purchases outside the price cap, moves approved by Treasury Secretary Janet Yellen.

Crude prices weaken as cap on Russian oil launches Crude prices weaken as cap on Russian oil launches https://tmsnrt.rs/3UARyqe

(Reporting by David Lawder and Timothy Gardner; Additional reporting by Noah Browning in London; Editing by Heather Timmons, Marguerita Choy and Kim Coghill)

((David.Lawder@tr.com; +1 202 354 5854; Reuters Messaging: david.lawder.thomsonreuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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