He is not low, not high – Newspaper Kommersant No. 218 (7419) dated 11/24/2022

The US and EU are finalizing preparations for a price ceiling on Russian oil in an unprecedented effort to control the cost of the world’s most important commodity. The US Treasury has published a clear list of rules that market participants must adhere to in order not to be punished for violating the ceiling. Its level has not yet been set: the US and the EU are discussing a range of $65-70 per barrel, but in any case it is planned to be reviewed regularly. However, the Russian authorities say that they will not sell oil by the ceiling, regardless of its value, and only the threat of a price shock from the OPEC+ countries can stop the revision of the rules of the game.

The European Union and the G7 are discussing the maximum purchase price of Russian oil at $65-70 per barrel, Bloomberg sources say. On November 23, the decision on the marginal price of oil was submitted to the EU ambassadors for consideration. The regime will begin to apply to goods purchased after December 5. The marginal price level may be revised further.

At the same time, the US Treasury issued guidance to market participants regarding the price cap. Recall that from December 5, American and European companies will not be able to trade in offshore shipments of Russian oil, finance such transactions, provide vessels and insurance services for them. However, all these transactions will be allowed for them if the oil is sold below the set price.

Since European companies control a significant part of the world’s tanker fleet, and Western companies as a whole control more than 90% of the marine insurance market, Russia, according to US and EU authorities, will have to agree to a ceiling in order to sell its oil.

The US Treasury specifically dwelled on the conditions that market participants must comply with in order not to be punished for violating the ceiling. Thus, those companies that have direct access to price information on transactions (traders and commodity brokers) must have and keep documentary evidence for five years that they bought Russian oil at a price not higher than the ceiling: these can be contracts, checks, invoices etc. The rest of the players (for example, insurance companies) can simply receive a written assurance from their counterparties that they comply with the sanctions restrictions.

The ceiling itself applies to oil shipped from Russia by sea, until it passes customs clearance in another jurisdiction. Further transactions with this oil, if it is transported by land, are not subject to the ceiling. Also, the regulation does not apply to petroleum products produced from Russian oil in third countries, while the level of processing must be significant (blending is not considered such).

The Russian authorities have repeatedly stated that they do not intend to sell oil to countries that will apply the ceiling.

Deputy Prime Minister Alexander Novak pointed out on November 21 that Russian oil companies could cut production if they failed to sell their oil to “market-oriented partners.” This statement was made public almost simultaneously with the statement of the Minister of oil of Saudi Arabia, Abdulaziz bin Salman, who not only denied the WSJ reports about a possible increase in the OPEC + quota at the meeting on December 4, but also allowed “additional measures to reduce production” if necessary.

The price ceiling poses a potential threat to the regulatory function of OPEC + and could lead to the formation of a cartel of oil consumers, Yury Stankevich, a member of the State Duma Energy Committee, told Kommersant. World oil exports, almost 70% controlled by OPEC and Russia, are a typical seller’s market, where producers set prices, the deputy explains, and setting a ceiling is an attempt to strengthen the role of consumers in determining prices.

OECD countries, India and China buy almost 90% of all oil imports in the world, India and China account for more than a third of imports, he continues: even by formally refusing to implement the price cap mechanism, India and China can use it to their advantage. According to Mr. Stankevich, having tested such a mechanism in Russia, Western countries can apply it to other oil exporters, including members of OPEC. “Only the threat of a supply shock from OPEC, like what happened in the mid-1970s, can stop the global redistribution of energy markets,” he notes, adding that it is in the interests of Russian oil companies to work with OPEC + partners on the possibility of forming a consolidated position and its communication to consumers.

Analysts expect some reduction in exports and production of Russian oil as a result of the introduction of the ceiling.

According to Maxim Malkov from Kept, oil production may decline in Russia, but after the supply chains are established, it will recover within two to three months. A refusal or a sharp decrease in interest in buying Russian oil is unlikely, since consumers do not have many fallback options, said Sergei Kondratyev of the Institute of Energy and Finance. He also admits that during the first two to four months after the introduction of the ceiling, it is highly likely that the main purchases of Russian oil will come from state-owned companies in China and India, since they are less afraid of sanctions, and Russian traders.

Dmitry Kozlov