While a $60-per-barrel oil price cap may sound straightforward, implementing it in what is a complex market could get very messy.
Physical oil is nearly never traded at fixed prices, instead being sold at a premium or discount to the forward prices of major benchmarks.
Traders are now worried they might inadvertently violate the cap while banks are increasingly worried about the high compliance risk.
The $ 60-per-barrel price cap on Russian crude oil, which came into effect on Monday, looks pretty straightforward. Buyers paying $60 or less per barrel of Russia’s crude will have full access to all EU and G7 insurance and financing services associated with transporting Russian crude to non-EU countries.
However, the physical oil market doesn’t usually see trades with fixed prices of crude - oil is being sold at a price premium or discount against the forward prices of the major international benchmarks such as Brent or the Oman/Dubai average.
So, the price cap is much more complicated than a straightforward $60 per barrel ceiling.
As a result, traders of physical oil cargoes are confused by the price cap on Russian crude, wondering how a fixed price would work in a market that trades oil on a forward floating basis against international benchmarks. Physical oil traders, those who are willing to trade crude in compliance with the price cap, are also concerned that they could end up inadvertently violating the cap if, for example, the price of Russia’s flagship grade, Urals, with a discount to Brent, is higher than $60 per barrel weeks after the oil trade has been made.
In such cases, traders would be stuck with above-$60 Russian crude that violates the price cap and would significantly limit access to EU/G7 tankers and maritime transportation services such as insurance and financing, oil traders tell Bloomberg. This could complicate the physical handling of Russian crude oil cargoes and hedging, they say.
“Physical traders rarely trade on a fixed price,” John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg.
“It’s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows,” said Driscoll, who has more than 30 years of trading oil in Singapore.
The price cap is not set in stone - it “is fixed for now but adjustable over time,” the EU said last week.
A price revision would “take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, the potential impact on coalition members and partners, and market developments,” the EU says.
Even within the price cap, banks are generally wary of providing financing, industry officials told Global Trade Review this week. Banks are concerned by the high compliance risk and fear they will have to increase scrutiny and due diligence to avoid being caught in a trade or deceptive shipping practices.
Adding further confusion for physical oil traders is Russia’s position on the matter. Moscow says it will not trade its oil with countries that have joined the price cap.
The EU says that “With the price cap, there are clear incentives for Russia, oil importing countries and market participants to maintain the flow of Russian oil. This will achieve both objectives at the same time.”
But Russia says the price cap artificially limits prices—a mechanism Moscow will not accept.
By the end of this year, Russia expects to have legislation prepared that will ban Russian companies from selling oil to countries part of the Price Cap Coalition, Russia’s Deputy Prime Minister Alexander Novak said on Tuesday.
Russia is also preparing a response to the EU embargo and the price cap, Kremlin spokesman Dmitry Peskov said on Monday.
“One thing is obvious - we will not recognize any price caps,” Peskov added.
There are signs on the market that Russia and less scrupulous tanker owners have been amassing a large ‘dark fleet’ of tankers to ship Russian crude outside the price cap and any EU/G7 insurance and financing provisions. The tankers may not be enough to ship all the Russian oil previously sold in Europe, and Russia could struggle to place all its previously Europe-bound oil to other markets, such as its now biggest customers, China, India, and Turkey, analysts say.