G7 Oil price cap will become more complicated

About a month ago, the Group of Seven (G7) coalition imposed a price cap on Russian oil in order to reduce oil revenues that go to finance Russia’s war machine. The G7, consisting of the United States, the 27 European Union, Canada, Australia and Japan– A maximum price of US$60/barrel has been set for Russian crude oil, with the provision that the limit may be adjusted in the future to respond to market developments. This cap must be implemented by all members Price Cap Coalition through its own internal legal processes.

But things are about to get murkier as the G7 considers tightening the ropes on Russia’s energy revenues. Starting February 5, the G7 will impose price restrictions on Russian products such as diesel, kerosene and fuel oil in a bid to further reduce Moscow’s energy export revenues and ability to finance its war against Ukraine. In addition, the Group now plans to appoint two price ranges On Russian refined products in February; one for trading Russian oil products at a discount to crude oil and the second for trading Russian crude oil at a premium.

However, limiting the prices of Russian petroleum products is likely to be a more difficult task than limiting its crude oil, for the simple reason that there are more petroleum products and their prices depend more on where they are produced. For example, diesel and kerosene tend to trade at a premium to crude oil, while fuel oil is usually traded at a discount.

Does the oil price cap work?

And now the million-dollar question: Is the current Russian crude oil price cap really working as intended? Well, it depends on who you ask. The Kremlin came out on Wednesday and claimed that he has not yet seen cases of Russian oil prices rising.

As for losses, no one has seen the special caps yetKremlin spokesman Dmitry Peskov told Reuters at a daily briefing.

Related: Europe Still Attracts Most US LNG Despite Falling Prices

Analytical teams contradicted the Kremlin’s position and said that the limit of oil prices definitely harms the country.

Currently, Russia’s most advanced Urals oil mix is ​​selling below $60/barrel.

Finnish researcher recently told Bloomberg The Russian oil price cap already costs the Kremlin 160 million euros ($172 million) a day and could rise to $280 million a day when the cap is extended to refined products from February 5. Last month, even Russian Finance Minister Anton Siluanov said that the country’s budget deficit in 2023 can pass An expected 2% of GDP cap on oil prices hits export earnings. It was the first time a Russian official acknowledged that the $60/barrel price ceiling imposed on Russia by Europe and the G7 countries would have a negative impact on its economy. Siluanov said that the country will use the debt markets to eliminate the deficit. Russia expects to use just over 2 trillion rubles ($29 billion) from the National Wealth Fund (NWF) in 2022 as total spending exceeds the original budget by 30 trillion rubles.

In the same month, the head of the Central Bank of Russia, Elvira Nabiullina, said that the country’s economy was expected. three percent contract In 2022, a sharp reversal from growth in 2021 due to “deteriorating trade conditions”. He added that in 2023, as oil and gas sales to Europe will decrease, Russia’s cash flow is expected to weaken significantly.

Meanwhile, Ukraine says it expects the EU to impose an embargo on Russian oil and oil products. It reduced Russia’s profits by at least 50%.

We expect more than 50% of the income from oil and gas exports, precisely because of the EU embargo on oil and oil products and the introduction of price restrictions. Oil and gas account for 60% and 40% of federal budget revenues. We expect Russian revenues to fall below the critical level of $40 billion per quarter“Ukraine’s first deputy prime minister and economy minister, Yuliya Svyridenko, said she hoped that the decline in profits would make it difficult for Russia to continue a full-scale war.

Last month, leading shipping magazine Lloyd’s List reported that seven loaded Suezmax vessels were fully compliant with the $60 per barrel price limit. He sailed from Russian waters. According to the magazine, inspections showed that all seven vessels had secured insurance with International Group P&I clubs, which require proof of compliance with the G7’s $60 per barrel limit before marine insurance can be provided.

By Alex Kimani for Oilprice.com

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