A low ceiling on the price of Russian oil could encourage the Kremlin to disrupt energy markets further
Carol Ryan, WSJ
EnergiesNet.com 12 01 2022
First natural gas, next oil? A lower-than-expected cap on the price of Russian oil exports could encourage Moscow to cause further trouble in energy markets.
The European Union’s executive arm has asked member countries to approve a ceiling on the price of Russian oil of $60 a barrel, The Wall Street Journal reported Thursday, below the $65-to-$70 figure mooted lately. Any Russian oil sold above this price wouldn’t be eligible for services from companies in the EU and U.K. that finance and insure around 90% of the world’s ships.
The number could still change and all 27 member states need to agree to it. Poland is pushing for a lower cap to deprive Russia of more of the oil revenues that are helping to finance its war in Ukraine. Greece and Malta are more aligned with the U.S. and would rather see it set around $70 to protect their big shipping industries.
The U.S. wants to keep Russian oil flowing and prevent a fresh increase in energy prices that have fueled domestic inflation. Although Russian President Vladimir Putin has said he won’t sell oil to any country that applies the cap, the U.S. thinks that if the price is set at the right level, Russia will have an incentive to sell its oil under the G-7 terms.
It is a delicate balance, especially as it isn’t fully clear how much Russia is currently getting for its oil. According to S&P Global Commodity Insights, Russian Urals oil sells at a roughly 30% discount to global benchmark Brent, as European traders in particular have become wary of handling it. This suggests Russian oil costs around $62 a barrel, based on where Brent is currently trading.
Others think the discount is smaller. As Iranian oil trades at a roughly 25% discount under one of the world’s strictest sanctions regimes, Goldman Sachs estimates Russian oil may be priced 20% below crude. If this is the case, the oil price cap might need to be higher than $60 to cause no disruption if it comes into force Monday as expected.
This murkiness makes it hard to judge the tipping point at which Russia may decide to hit back, which is likely one reason it is taking the EU so long to agree on a number. If the price cap is set too low, the Kremlin may tap the world’s dark fleet to get its oil to market independently, without the need for Western insurance. These aging tankers that sail with their transponders turned off usually transport the oil cargoes of countries such as Venezuela, on which U.S. sanctions are now easing.
Russia’s income has taken a hit recently as worries about the global economy have pushed down energy prices. In October, its monthly oil revenues were $17.3 billion, according to estimates from the International Energy Agency, more than before the war but down from $21.9 billion in June. Mr. Putin’s government is forecasting a budget deficit of 2.4% of output in 2023, based on the assumption it can sell its oil at an average of $75 a barrel next year, Bernstein Research says.
Russia has already created an energy crisis in Europe by choking off pipeline-gas supplies. Oil markets are more global, so any efforts by Moscow to repeat this would have broader but more diffuse results. They would also cost Mr. Putin more, given his greater reliance on oil than gas for revenues.
Still, the more a price cap succeeds in hurting Russia, the bigger the risk it will squeeze the oil markets in return.
Write to Carol Ryan at email@example.com
wsj.com 12 02 2022