Infographic: Oil price cap, EU sanctions on Russia poised to further shake up global oil flows

EU sanctions and the G7's price cap on Russian oil could upend some 2.5 million b/d of seaborne oil trade to Europe as Russian crude and oil products struggle to find new buyers outside the trade bloc, according to analysts at S&P Global Commodity Insights.

But global oil markets remain in the dark over how the US-led attempt to slash Russia's oil revenues will play out even as the deadline for the G7 price cap and an EU ban on imports approaches on Dec. 5 for crude and Feb. 5 for products.

More than four months in the making, G7 nations have yet to set the maximum price at which shippers from G7 and EU countries may legally transport Russian crude and products. On Nov. 4, the group reiterated a month-old pledge to finalize the measure in the 'coming weeks'. The price level, widely expected to be around $60/b for Russian crude, is a key factor in how Russia responds to the cap and a marker for the potential profits from circumventing the rules.

Russia has made it clear it has no intention of selling its oil under the price caps, meaning it will need to develop alternative supply chains to bypass the measures or shut-in its displaced oil.

Click here for full-size infographic

Many expect refiners in China, India, and Turkey --the top current destinations for Russian crude-- to absorb more of the affected oil. Combined, the three buyers have seen their seaborne imports of Russian crude almost treble from pre-war levels to over 2 million b/d, accounting for nearly 70% of Russia's seaborne flows.

But the availability of an unregulated or 'shadow' tanker fleet to redirect flows and local refining slate constraints are limiting factors.

"There is still a lot of uncertainty...the price cap level has still not been set," said Shin Kim, head of oil and gas supply analytics at S&P Global Commodity Insights. "But the initial impact of the cap will likely be muted as Russia will not want to participate in trade with countries using the price cap. We do assume that the use of non-western shipping insurance and services will be used to move a good chunk of [displaced] Russian crude."

As Moscow struggles to redirect all its displaced oil, S&P Global expects Russian production shut-in as a result of the new export hurdles to peak at 1.5 million b/d in the first quarter of 2023 but would ease as more sanction workarounds are found.

Known unknowns

A number of uncertainties over the timing and implementation of the cap continue to trouble shipping markets and maritime insurers.

The US clarified on Oct. 31 that any Russian-origin cargo loaded before Dec. 5 and discharged by Jan. 19 is not subject to the price cap. Allowing Russian crude to be unloaded before Jan. 19 gives oil markets some wiggle room to get used to the new measures.

"The adjustment could buy a little time, but we still forecast the need to re-route about 2.5 million b/d of banned EU crude and product imports by Q1 to cause a supply drop of 1.1 million b/d between Oct 2022 and Feb 2023," Paul Sheldon, chief geopolitical adviser at S&P Global, said. "Thereafter, volumes could bounce back faster than our forecast for 90,000 b/d of growth between Mar. and Dec. 2023, if Russia holds its nose and sells into the price cap or overcomes the logistical hurdles from bans on Western shipping services."

But insurance and shipping service companies still want to know when the sales price for a Russian cargo would be recorded and how the price would be verified. It remains unclear also how disputes over pricing and cargo origination would be resolved.

Further uncertainty lurks in the EU's potential exemptions from shipping restrictions contained in its updated eighth sanctions package, which includes a provision to enforce the G7 price cap. Brussels can grant exemptions for the transport of certain crude and oil products to third countries. On this basis, the EU has exempted the transport by vessels to Japan of crude commingled with condensate, originating in the Sakhalin-2 Project in Russia until June 5, 2023.

Potential derogations also exist for shipping services that are necessary for humanitarian purposes, civil society activities that promote democracy, human rights or the rule of law in Russia and "ensuring critical energy supplies and infrastructure."

"Many insurers and banks will likely, initially at least, take a blanket approach that it is not a risk that they want to be associated with," said Peter McNamee, a partner at law firm Ince Gordon Dadds. "For the time being it will remain a difficult environment to operate in for shipowners and insurers/banks alike, and caution should be the watchword. However, as the details of the price cap become clearer and the application process is understood, if there is sufficient volume of cargo, then insurers and banks may take a more relaxed approach and assess things on a case-by-case basis," he said.

Evasion fleet

The ability of Russia to sidestep the sanctions and price cap to redirect its oil will largely depend on the scale of Russian and other 'shadow' oil tankers willing and able to operate outside the curbs.

Currently, EU and G7-based shipowners enjoy a large market share in the Russian tanker trade. S&P Global data suggests they lifted 55% of Russia's crude exports from the Baltic and Black Sea in September, according to Fotios Katsoulas, liquid bulk analyst at S&P Global Market Intelligence. The G7 estimates that about 95% of the global oil tanker fleet is covered by shipping insurers in G7 countries, namely Canada, France, Germany, Italy, Japan, the UK, and the US.

As a result, Russia will need its own dedicated fleet, seen likely consisting of mostly end-of-life tankers, to form a pariah tanker fleet to evade the price cap.

Research from shipping brokerage Braemar estimates that 157 Aframaxes, 65 Suezmaxes and 18 VLCCs are likely to be required to carry Russia's seaborne crude exports estimated at around 3.5 million b/d. Currently, 50 Aframaxes/LR2s and 10 Suezmaxes are controlled by Russian firms while 35 Aframaxes/LR2s, 20 Suezmaxes and 15 VLCCs aged 15 years or older have been sold to unidentified firms this year, and those could be used to carry Russian barrels under the radar.

Based on those figures, Russia could be faced with a shortfall of 110 tankers to service seaborne Russian crude trade, according to Braemar.

Sergey Vakulenko, an independent energy analyst who was head of strategy at Gazprom Neft until February this year, expects Moscow to turn to Indian, Chinese, and Persian Gulf shipping companies to alleviate the deficit of ships. Russian oil companies could also attempt to charter tankers from the market willing to pay for services from a limited pool of non-European suppliers, most likely at a higher price.

"Whatever tactics are used, the accumulation of a fleet will take some time. In the meantime, Russian production may be reduced and limited by the available shipping capacity, which will likely lead to a period of volatility on the oil market," Vakulenko said in October.