Column by Yuri Barsukov about the end of the oil price ceiling phenomenon

By mid-October, ten months after the G7 countries imposed a price cap on Russian oil, Urals was not only well above the prescribed $60 per barrel limit, but its discount to Brent had narrowed to its lowest level since the conflict in Ukraine began.

The Russian Ministry of Finance reported on October 16 that over the past month the discount averaged $10.08 per barrel, and last week, according to Argus, it fell below $10 in Northwestern Europe. The size of the discount is increasingly approaching the level of freight to India from European ports of the Russian Federation, which now amounts to about $7 per barrel for Aframax tankers.

The fact that the price ceiling obviously does not work has so far caused a rather weak reaction from the US and EU. Last week, the United States added two tankers to its sanctions list for allegedly carrying Russian oil above the ceiling. The impact of this measure is unlikely to be significant, given that, according to Lloyd’s List Intelligence, the “shadow fleet” involved in the transportation of Russian oil and petroleum products numbers 535 vessels.

The insignificance of direct sanctions pressure, in my opinion, is due to the fact that Western regulators are convinced of its low effectiveness when it comes to such a large market as the oil market. Instead, the United States has set a course toward displacing Russian oil through market means due to increased supplies from Iran and Venezuela.

The latter are formally subject to even tougher American sanctions than Russian oil, but in practice Washington has relaxed control measures: as a result, in August, oil and condensate exports from Iran reached 2.2 million barrels per day, and production increased to a maximum in ten years. Washington also allowed Tehran to receive $6 billion frozen in accounts in South Korea and another $10 billion of Iraq’s debt for gas supplies. As for Venezuela, the United States, according to The Washington Post, plans to conclude an agreement on Tuesday to formally ease sanctions on the country’s oil industry in exchange for a number of promises from Caracas regarding future presidential elections.

However, the current rise in geopolitical tensions in the Middle East calls into question the prospects for such a policy: it is unclear whether the United States will be able to continue to turn a blind eye to the growth of oil exports from Iran if the military situation in the region escalates. On the other hand, tightening the screws on Iranian supplies will further tighten the shortage of medium-sulfur crude, and there is no evidence that Saudi Arabia – the only player that could easily compensate for these volumes – is willing to increase production.

Meanwhile, the breaking of the price ceiling for Russian oil is gradually becoming an unpleasant but established state of affairs for Western countries, the fight against which is looking increasingly difficult and costly.