EU reaches deal for $60/b price cap on Russian crude ahead of G7 deadline

The EU reached an agreement Dec. 2 for a $60/b price cap for Russian crude, paving the way for the G7-led initiative to launch Dec. 5, a move expected to further shake up global seaborne oil trade as Russian crude and oil products struggle to find new buyers.

After a week of diplomatic wrangling on the price level in Brussels --with Poland holding out for a lower price-- the EU agreed to back an initial $60/b price cap level, local reports and Western newspapers cited Andzrej Sados, Poland's permanent representative to the EU, as saying.

The cap agreement also includes a provision that the price ceiling is regularly reviewed to ensure it is at least 5% below average market prices for Russian oil, according to the reports.

The Polish diplomat said the price deal allows the EU to begin a written procedure for approving the agreement ahead of a formal announcement from the EU and G7 over the weekend, according to Polish state news agency PAP.

More than five months in the making, the price cap sets the maximum price at which shippers, insurers, and maritime service providers from G7 and EU countries may legally transport Russian crude and products. The G7 price cap also coincides with the EU's own embargo on seaborne Russian oil imports due to start on Dec 5.

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. 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.

Price level

The G7's price cap will apply to Russian crude based on free-on-board prices, which do not include the cost of insurance and shipping. In the five years to Dec. 1, Platts' assessment for Urals crude sold on an FOB basis from the Baltic Sea port of Primorsk has averaged $62.29/b. Before Russia's invasion of Ukraine on Feb 24, the discount to Dated Brent averaged around $2.80/b but jumped to record highs over -$40/b during the summer and has recently held at around $33/b below Dated Brent.

Urals FOB Primorsk was assessed by Platts at $55.79/b on Dec 1.

With the price cap above current prices for Russian key export crude Urals, some market watchers have speculated that Russian exports will continue to flow broadly as before, having little impact on Moscow's oil revenues but achieving the aim of G7 policymakers who want to keep the global market well supplied.

Russian seaborne exports of crude and oil products have remained mostly resilient in recent months despite the incoming EU sanctions and price cap as China, India and Turkey largely snapped up Russian oil displaced from Europe and the US, according to tanker tracking data.

Seaborne exports of Russian crude rose to 3.09 million b/d in October, according to data from S&P Global Commodities at Sea, up 3% on the month and just below the pre-war average of 3.1 million b/d in January and February. Russian product exports fell 4.2% on the month to 2.08 million b/d in October, down from 2.8 million b/d before the war.

Market upheaval

The cap price level is a key factor in how Russia responds and a marker for the potential profits from circumventing the rules. US officials have said the price caps will be set between the marginal cost of production for Russian oil and pre-pandemic prices for Russian oil in the global market to incentivize Russia to continue producing and exporting.

But 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.

Analysts at S&P Global Commodities Insights estimate that some 2 million b/d of Russian crude and products to Europe will ultimately need to find new buyers when the EU's full oil sanctions on Moscow take effect Feb. 5, 2023.

"Concerns over compliance with insurance and financial sanctions will cause apprehension among some market participants, with or without the price cap, which would become problematic if including buyers that already ramped up purchases since the war began," S&P Global's chief geopolitical advisor, Paul Sheldon, said in a note.

S&P Global analysts estimate that the initial dislocations will lower Russian crude and condensate output by 1 million b/d between November and March, to 1.5 million b/d below pre-conflict levels.

"However the odds are rising that supply could exceed our expectations," Sheldon said. "Russia has already had significant time to prepare, increasing its ability to secure a sufficient fleet of ships and non-Western maritime services."

A softening of the EU ban on ships not complying with the price cap could also increase tanker availability while more sanctions exemptions could arise allowing Russia to "hold its nose and maintain supplies, especially if the alternative is damaging shut-ins," he said.