To achieve those goals, the allies agreed to explore a new mechanism that aims to impose a ceiling on Russian oil prices. The idea behind this price cap is to permit countries that have not imposed import bans to buy Russian oil as long as it is priced at or below a predetermined price. The cap could be enforced via limits on availability of European insurance for Russian oil cargoes as well as shipping services and US finance.
While G7 leaders have not indicated where the price cap would be set, it must be lower than the $80/bbl at which Russia’s Urals grade trades today (a $32/bbl discount to Brent) and higher than Russia’s marginal cost of maintaining production levels, estimated at around $40/bbl to ensure Russia’s earnings are reduced while production is maintained.
A $50-60 per barrel price cap would likely serve the G7 goals of reducing oil revenues for Russia while assuring barrels continue to flow.
But it remains unclear how effective a price-cap regime would be, since for the price-cap to work, oil importers like India, China, and Turkey - which have significantly increased their purchases of heavily-discounted Russian grades - would need to agree to participate to access even cheaper oil.
Furthermore, as we previously detailed, there are three scenarios as to what happens next:
Scenario 1: Russia does not cooperate and retaliates - a 3 mbd cut would likely deliver a $190/bbl oil price
Scenario 2: China and India don’t cooperate - the end of the European insurance dominance
Scenario 3: Russia fully re-routes exports from west to east but loses pricing power, prices stabilize in low-$100s
There has so far been no reaction to the headlines...
Which we suspect reflects the market's reality check that this G-7 plan has no chance of becoming operational as to implement a cap, diplomats will have to convince European Union member nations to amend its sixth round of sanctions on Russia over the invasion of Ukraine - and that may still prove to be tough. That package, which prohibits the purchase of Russian oil starting Dec. 5, included a ban on the use by third countries of the bloc’s companies for oil-related insurance and financial services.
“The price cap fundamentally lacks impact unless the G-7 can persuade the other main buyers (i.e. China, India, Turkey, etc) to sign up,” Christopher Haines, a global crude analyst at consultant Energy Aspects, said in an emailed response to questions.
“They are all reluctant despite the offer of exemptions from Western financial and shipping insurance sanctions. Meanwhile Russia will be determined to undermine the policy for both political and economic reasons.”
Russia said Friday that it won’t sell oil to nations that impose a price cap on its oil. “We simply won’t interact with them on such non-market principles,” Kremlin spokesman Dmitry Peskov told reporters on a conference call, adding that Russian oil will find alternative markets.
Oil is a global, fungible commodity. Will OPEC+ abide by caps? The Saudis and Russians account for 25% of the exportable oil. They can reduce production, which will increase the price hence giving them the same revenues for less exports.
You are making so many unrealistic assumptions about how easy it will be to replace Russian oil and gas. It is far from easy. You need to construct the infrastructure to receive the product from other sources. The Italians, British, French, and Germans are not so sanguine. They are planning emergency measures, some of which are already being implemented. There is no deus ex machina that will save them.
"Berlin and Leipzig Germany will see the first of a series of planned “Monday protests” against soaring energy bills. Protesters in Berlin will rally from 7pm outside the offices of the Greens under the slogan “Enough is enough — protest, don’t freeze.”
