Russian Oil Price Cap May Not Be the Hoped-for Fail-Safe


Expect the oil market to get a lot more volatile in the coming weeks.

From Dec. 5, it will be illegal to import Russian crude by sea into the European Union (with minor exceptions) and for EU companies to provide services such as insurance and financing for ships carrying the oil anywhere in the world. If the latest round of sanctions is ratified, it will also be illegal for European ships to be employed in that trade.

The disruption could be huge. Moscow already has lost a large chunk of its European market, with buyers shunning its wares even before the ban comes into effect. But the country is still shipping about 630,000 barrels a day to EU countries. The volume hauled globally on vessels owned by European companies is significantly bigger.

Russia doesn’t have many obvious options for redirecting that capacity and almost none that are nearby. Sales to India, and to a lesser extent to China and Turkey, surged in the weeks after President Vladimir Putin ordered his troops to invade Ukraine. But that flow peaked in June and has eased slightly in recent months.

New Delhi, Beijing and Ankara may be unwilling to boost volumes without steeper price discounts. They will certainly see the prospect of Russian crude stranded by European sanctions as an opportunity for tough negotiations on what they’re willing to pay.

Beyond those three countries, Russia hasn’t had huge success in finding other customers. It continues to send occasional cargoes across the Atlantic to its friends in Cuba. One or two have ended up in Egypt or at Fujairah in the United Arab Emirates.

About 3 million barrels have been sent to Sri Lanka, but the tankers plying that route have been forced to anchor off the port of Colombo for weeks until the government can find the money to pay.

If the size of the fleet available to move Russian oil shrinks with the loss of European vessels, long periods of idleness for the remaining vessels will cause Moscow more headaches.

Shipping crude from the Baltic to India ties up vessels for at least four times as long as delivering cargoes to Rotterdam, so moving the same volume will require four times as many ships. Lengthy delays will raise that requirement even further.

The US Treasury has sought to overcome this problem with its proposed price cap on Russian crude — an idea that’s gained traction with politicians in allied countries, even as it has been dismissed elsewhere.

The concept is simple: If a buyer pays less than a yet-to-be agreed price, they can use European ships and secure financing and insurance. The aim is to keep Russia’s crude flowing while crimping the Kremlin’s revenue.

The view in Washington appears to be that if the capped price is set above the cost of production, Russia will have an incentive to keep exporting. What they don’t seem to grasp is that the decision for Russia is a political one, not a commercial one.

Putin has said more than once that his country  won’t sell crude to buyers who seek to impose a cap, while Deputy Prime Minister Alexander Novak said after the recent OPEC+ meeting in Vienna that the “mechanism is unacceptable.” Novak also warned that it could force Russia to temporarily halt some production.

US Treasury Secretary Janet Yellen is wrong when she says “this cap will help us keep global energy markets well-supplied.” It won’t. I don’t believe a single barrel of Russian crude will be sold at a capped price.

But that’s Putin’s choice. The alternative to the price cap isn’t the free flow of his oil; it’s the full force of the EU sanctions. The US proposal is intended to provide a way of avoiding those sanctions, even if the Russian leader refuses to make use of it. The Kremlin will gamble that stopping Siberian oil pumps will hurt buyers more than Russia, a calculation it has already made for natural gas.

Can oil markets weather this loss on top of a 2 million barrel-a-day cut in OPEC+ targets that’s due to come into effect in November?

The first thing to bear in mind is that the OPEC+ action is mostly illusion. The actual cut in output from September production levels could be as little as one-tenth of the headline figure — hardly enough to break a sweat over. At the same time, demand forecasts are being slashed — the result of high prices and impending recession. Those two factors may mean that the world needs less Russian crude in the coming months.

But with so many moving parts and Russia doing all it can to keep markets on edge as the sanctions deadline looms, just don’t expect markets to slide quietly into winter.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg First Word. Previously, he was a senior analyst at the Centre for Global Energy Studies.

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