G7, Australia agree on price cap levels for seaborne Russian petroleum products

The G7 and Australia announced Feb. 3 that consensus had been reached on price cap levels for Russian-origin refined oil products ahead of new sanctions kicking in to ban EU countries from importing seaborne Russian petroleum products as part of the continued global response to the Russian war in Ukraine.

EU prohibitions on vessels and other maritime services needed to transport Russian petroleum products will take effect Feb. 5. Price caps, already in place for Russian crude following a Dec. 5 EU ban on seaborne Russian oil imports, have been devised as a carve-out for EU and G7 maritime service providers to continue aiding with the seaborne transport of Russian fuels as long as they are sold at or below the cap levels.

Under an agreement reached among a coalition of countries, the G7 will impose price caps of $100/b on imports of Russian products that typically trade at a premium to crude, such as diesel, kerosene and gasoline, and $45/b on products like fuel oil that generally trade at a discount to crude.

The price cap coalition, which includes Australia, Canada, the EU, France, Germany, Italy, Japan, the UK and the US, also committed to "monitoring [the price caps'] effectiveness and impact on an ongoing basis," according to a press release.

A review of the $60/b cap on seaborne Russia-origin crude oil is expected in March.

"We recommend that importers of seaborne Russian-origin crude oil and petroleum products in countries outside our jurisdictions continue leveraging the price cap to purchase discounted Russian oil and petroleum products," the coalition said. "The price cap policy should offer developing market economies, in particular, access to oil and petroleum products at a discount to prevailing market prices."

Grace period

Refined product price cap regulations will take effect Feb. 5 "or very soon thereafter," the coalition said, with a 55-day grace period for refined products loaded before Feb. 5 and unloaded by April 1.

The US Treasury Department has said that the window for unloading provides confidence that entities can continue to carry Russian products and sign purchase contracts above the price cap ahead of Feb. 5, avoiding a sudden halt in Russian products flow leading up to price cap implementation, while also ensuring that stakeholders are mindful of the price cap guidance.

Market observers, however, have warned that shipping logistics could prove more challenging as refined products that generally travel in smaller tankers search for fleet capacity.

The embargo on Russian refined oil products is likely to stress near-term European supply, but the US futures market expects a calm transition as it had already priced in any immediate disruptions.

French refinery strikes have helped to bolster European refined products crack spreads as the EU ban approaches.

"Uncertainty over demand coverage, especially for diesel, but also naphtha, should keep prices supported as the European market prepares to lose its key supplier," S&P Global Commodity Insights analysts Rebeka Foley and Lenny Rodriguez said in a report. "Meanwhile, a prolonged period of protests could disrupt output and tighten regional balances, which is what happened in October 2022, when strikes led France to release emergency stocks and clean product cracks to surge."

Russian refineries will likely keep processing rates steady in February, market sources said, though they did not rule out some cuts later in the month due to the EU ban.

Longer term, the sanctions are likely to result in a reconfiguring of global supply chains, rather than tighter supply. European buyers have already stepped up imports from Turkey and India -- both countries that have become top buyers of Russian crude in the wake of the separate EU ban on Moscow's crude exports from Dec. 5.

Fading concerns of any near-term supply impact have been reflected in a general weakening of diesel cracks in recent weeks. Both the New York Harbor and Northwest Europe diesel crack versus Brent have fallen to nine-month lows in early February.

Treasury response

Agreement on the price caps comes amid reports that some EU countries continue to push for lowering the price thresholds to put greater pressure on Russia.

Analysts at Rapidan Energy Group noted in an email that "discounts to Russian products have widened this week and are now trading below the cap -- in line with Treasury expectations."

"The Biden administration is focused on getting the price cap implementation right and worry that going any lower at this point would significantly increase the risk of disruptions," the analysts said. "They are committed to doing a broad review of both price caps in March and open to lowering the caps then."

Treasury has long held that its two goals were to squeeze the Kremlin's oil export revenues and ensure the continued flow of Russian oil supplies to the global market.

"We have already seen early progress toward those objectives through the price cap on crude oil exports," Treasury Secretary Janet Yellen said in a statement Feb. 3. "Senior Russian officials have repeatedly admitted that the crude oil price cap is cutting into their most important source of revenue and has darkened the Kremlin's already troubled fiscal outlook. Global energy markets have also remained well-supplied, and public reports indicate that crude oil importers are using the price cap to drive steep bargains on Russian oil imports."

She applauded the price cap coalition's work to set caps on refined products.

"Combined with our historic sanctions, we are forcing [Russian President Vladimir] Putin to choose between funding his brutal war or propping up his struggling economy," Yellen said. "And, we are disrupting Russia's military supply chains, making it harder for the Kremlin to equip its troops and continue this unprovoked invasion."