EU & G7 Plan a Russian Oil Price Cap

The G7 is aiming for a price cap on Russian sea-borne oil in the range of $65 – 70 per barrel, a European Union diplomat said on Wednesday. Ambassadors from the EU are discussing the G7 proposal with the goal of reaching consensus by the end of the day. There are two sides – some ambassadors are fighting for a lower price cap and others are fighting for a lower one.

The EU, G7 and Australia are planning to implement the price cap on sea-borne exports of Russian oil on December 5th. This is part of their plan to increase pressure on Russia (which represents about 12% of global oil production), reducing their revenues from oil sales which are being used to finance the Russian/Ukraine war.

An EU diplomat had some comments on the talks:

The G7 apparently is looking at a $65-70 per barrel bandwidth…Poland, Lithuania and Estonia consider this too high because they want the price set at the cost of production, while Cyprus, Greece and Malta find it too low, because of the risk of more deflagging of their vessels, which might mean the G7 has found a good middle-ground.

Most of Russia’s crude exports are transported by tankers. The price cap is being implemented to stop shipping and insurance companies from handling Russian crude, unless it’s sold for the maximum price set by the EU price cap. The world’s key shipping and insurance companies are based in G7 countries, and the price cap would reduce revenues.

Russian had been emphatic that they will not accept a price cap, which may prove inconsequential as oil is already trading at a significant discount. Oil is currently down by about 4% at $78 US per barrel, with demand concerns evaluated against tightening global supplies.

The US and Europe is anticipating a slowdown in economic activity, and China (a large crude importer) facing continuing lockdowns in their attempt to manage COVID-19.  There is a long term risk to the fortunes of Russian oil companies, effectively forced out of the European / North American markets – with China and India happy to take advantage of cheaper Russian oil.