There are crooked ceilings about oil – Newspaper Kommersant No. 204 (7405) dated 11/02/2022

The United States did not have time to develop the parameters for the price ceiling for Russian oil and therefore allowed to continue transactions with it until January 19, 2023. Initially, the US and the EU were going to introduce the ceiling from December 5, but a month before this date, when market participants are already contracting December lots, the parameters of the mechanism are still unknown. Analysts note that the very concept of the ceiling was initially dubious, and in the absence of explanations about the conditions for its operation, the meaning of the measure is reduced to zero.

US Treasury moved introduction of a price ceiling for Russian oil, explaining that tankers loaded before December 5 will not be subject to restrictions. The deadline for the delivery of such oil cargoes will be January 19, 2023. Back in March, the United States and Great Britain imposed an embargo on Russian oil and oil products due to the military actions of the Russian Federation in Ukraine, following them, the EU decided to refuse sea supplies of oil from the Russian Federation by December 5.

Also, the US, EU countries and Japan are going to limit the price of Russian oil by refusing to insure and transport oil cargo if they are sold at a price above the ceiling. It is assumed that the limit will be set at about $60 per barrel. However, neither the US nor the EU has yet announced how the ceiling will be set, how transactions will be verified, and what procedure Western insurance companies, shipowners and brokers should follow in order to work with Russian oil cargoes without fear. In this situation, since the end of October, according to Platts, Western companies and some Asian processors have stopped taking Russian shipments, waiting for more clarity regarding the sanctions regime. The current resolution of the US authorities, in theory, will reduce these fears for at least the next month and prevent a surge in oil prices amid US congressional elections November 8th.

The attitude of the US administration towards the introduction of the ceiling began to change significantly after OPEC + decided to cut production quotas since November at 2 million barrels per day (b / d).

Thus, Saudi Arabia made it clear that it will not compensate for the possible loss of Russian volumes from the market as a result of the introduction of a price ceiling.

In October, US Treasury OFAC chief Andrea Gaki said Washington would not impose secondary sanctions on countries that buy Russian oil above the ceiling. Considering that over the past six months, Russian oil companies have redirected most of their supplies to friendly countries, the impact of the ceiling on Russian exports does not look catastrophic. However, the issue of tanker affordability remains, as more than 90% of the world’s tanker fleet is insured by American and European companies.

According to Maria Belova from Vygon Consulting, if a price ceiling is introduced, there will be a shortage in the market, and oil prices will rise above $100 per barrel, which will force the US to reconsider the parameters of this sanctions measure.

Taking into account the fact that the EU will refuse to import Russian oil from December 5, and the United States did this back in the spring, the question of the efficiency of the ceiling remains open, especially since there are mechanisms for barter transactions and settlements in national currencies, Ms. Belova notes. According to her, the reorientation of supplies from Europe has been going on for the past eight months, Russian oil supplies are growing to Asia, Africa and the Middle East, and after the imposition of EU sanctions, this trend will only intensify.

There will be many schemes for reloading oil at sea, with re-export to nearby countries, such as Turkey, and other ways of avoiding restrictions, suggests Sergey Kondratyev, deputy head of the economic department at the Institute of Energy and Finance. In the short term, within one to three months after the introduction of the price ceiling, exports may decrease by 0.3-0.5 million b/d, but in a few months Russia will be able to return to current production levels, he said. The IEA expects a reduction in supplies from Russia in the winter by 2 million b/d, Platts – by 1.5 million b/d.

The oil price ceiling is an experimental mechanism, states Igor Galaktionov from BCS Mir Investments, adjustment can take place on the fly, as feedback from the market comes in. Sanctions significantly increase the risk of supply disruptions and could lead to another price hike. The price ceiling is designed to mitigate the effect of sanctions for consumers, but, Igor Galaktionov notes, if market participants do not understand the conditions for its operation, this will nullify its entire effect.

Dmitry Kozlov