Ann M. Simmons, Andrew Duehren and David Uberti, WSJ

MOSCOW/WASHINGTON/NEW YORK
EnergiesNet.com 12 28 2022

Russia on Tuesday banned the sale of its oil and petroleum products to countries that put a cap on their sales price, in a move that threatened more uncertainty ahead for global energy markets.

The Kremlin’s action is an attempt to undermine a plan by the U.S. and its allies to bar the shipping, financing or insuring of seaborne Russian crude unless it is sold for $60 a barrel or less—a sanction leveled in response to Russia’s invasion of neighboring Ukraine.

A decree signed by Russian President Vladimir Putin on Tuesday said exports would be banned under contracts that “directly or indirectly provide for the use of the price cap mechanism” between Feb. 1 and July 1. The order says Mr. Putin can create exemptions for the sale of oil to countries following the price cap if he wants.

How the Kremlin views oil contracts—and how broadly it provides exemptions—will shape whether it creates a major disruption to global markets. Many of Russia’s crude exports are now selling at market prices well below the $60 cap, primarily to countries like India, China and Turkey that haven’t agreed to join the Western sanctions.

Some of these shipments are proceeding with the help of Western companies in line with the cap’s terms, according to people familiar with them, while others are happening with financing, shipping and insurance from outside the Western countries enforcing sanctions.

If the Kremlin decides to curb oil exports to non-Western buyers, it could reduce global supply and push up prices. If only the Western countries that crafted the price cap are targeted, the impact would be much more muted since they have already banned most Russian imports.

“The decree is vague and provides Putin with options to keep exports going to selected countries complying with the cap,” said Simone Tagliapietra, a senior fellow at the Bruegel think tank in Brussels. “All in all, this is a sign that Russia is in a vulnerable situation, needs oil revenues and therefore cannot take drastic retaliation measures.”

While Mr. Putin’s order threatens to disrupt markets, investors appear so far to be shrugging it off. Futures contracts for Brent crude, the global price gauge, edged about 0.5% higher Tuesday to $84.33 a barrel. Russian officials have threatened for weeks to cut off their oil supplies in retaliation for the cap.

Joining the U.S. in imposing the novel price-cap sanction were the Group of Seven advanced democracies, the 27 members of the European Union and Australia. Western officials are trying to limit the price at which Russia can sell its oil in an effort to dent the Kremlin’s war chest while still keeping Russian oil flowing to markets—and therefore stabilizing global prices.

A European Commission spokeswoman said Tuesday the EU already had banned the import of Russian oil. Hungary and several other landlocked EU nations pushed for exemptions to the embargo to keep importing pipelined Russian oil. Mr. Putin may now shut off those flows.

“The G-7 and Australia have already committed to ban or phase out imports of Russian oil,” a State Department spokeswoman said.

Oil and ship-tracking analysts say Russia’s crude output has declined since the array of sanctions came into effect. The price cap, along with the EU’s import embargo, launched on Dec. 5.

Russia has exported about 2.5 million barrels of its crude each day by sea in December so far, according to commodities-data firm Kpler. That is down 22% from the average for the first 11 months of the year.

That decline, largely reflecting reduced shipments from Russia’s eastern ports, is likely due to harsh winter weather and weak demand from China as its pandemic reopening has faltered, said Matt Smith, a Kpler oil analyst.

“The number of buyers of seaborne Russian crude has dropped to half a dozen or so countries,” he added, namely India and China.

As traders and investors have tried to price in the sanctions on Russian oil, the Kremlin and its trading partners expanded a global “shadow fleet” of tankers to ship crude exports without Western financing or insurance.

It is unclear if Mr. Putin’s decree will result in Russia curbing shipments that are sold at market rates to buyers in India, for example, and facilitated by Western companies.

Late last week, Russia’s mainstay Urals crude sold at $42.40 a barrel from the Baltic port of Primorsk, according to Argus Media, which tracks commodity prices. If the market price of Urals rises above $60 a barrel, the cap’s impact on markets could become more apparent.

Robert Yawger, executive director of energy futures at Mizuho in New York, said data indicate some buyers in Southeast Asia appear more reluctant now to snap up sanctioned barrels, leaving some tankers adrift in the Asia Pacific market.

“They’re looking for a home in India and China, but [those countries] have all the crude they need right now,” Mr. Yawger said. “They’re loaded up.”

Even so, market participants aren’t likely to miss the Russian barrels, for now. Global demand for crude oil has softened in recent months, and despite a recent three-week rally following China’s reopening and severe cold weather, oil prices could falter in the coming weeks if economic activity continues to languish, Mr. Yawger said.

“The demand side of the equation is a bigger deal right now,” Mr. Yawger said. “Supply isn’t really a problem.”

The Kremlin has played down the impact of trying to cripple Russia’s energy resources. On Thursday, Mr. Putin said he doesn’t see any potential losses for the Russian oil-and-gas sector from Europe’s price cap.

His Tuesday directive followed an announcement last week by the country’s energy minister, Alexander Novak, that Moscow could cut oil output in response to the Western price caps, reducing its production by 500,000 to 700,000 barrels a day—which he described as a 5% to 7% reduction in capacity—by early next year.

European countries, meanwhile, are preparing a February ban of refined petroleum products such as diesel that some analysts expect to have a greater impact on global markets. Western countries also will impose price caps on Russian petroleum products in February.

The energy conflict running in tandem with the war has contributed to “an unprecedented amount of uncertainty on the supply side and resulting volatility in oil markets,” said Paul Sheldon, a geopolitical risk analyst at S&P Global Commodity Insights.

Dan Michaels, Collin Eaton and Georgi Kantchev contributed to this article.

Write to Ann M. Simmons at ann.simmons@wsj.com, Andrew Duehren at andrew.duehren@wsj.com and David Uberti at david.uberti@wsj.com

wsj.com 12 27 2022