APPEC: G7 oil price cap helps cut Russian oil production: US Treasury official

The G7-led Russian oil price cap has helped cut Russia's oil production most recently after having slashed Moscow's oil revenue earlier in the year, a top US Treasury official said Sept. 4, despite mounting skepticism of the effectiveness of the nearly nine-month-old mechanism.

"Over the past couple of weeks, we have seen Russia cut production a little bit, conservative OPEC+ in general," Eric Van Nostrand, Assistant Secretary for Economic Policy, US Department of the Treasury said at the Asia Pacific Petroleum Conference 2023 organized by S&P Global Commodity Insights.

"And obviously, we've seen some upward pressure on prices," Nostrand said in response to a question about the effectiveness of the G7 oil price cap during an APPEC session, when he said the mechanism helped cut Russia's oil revenue, while keeping ample supply in the market.

"In the first half of this year, relative to last year, Kremlin's oil revenues are down 50%," Nostrand said. "At the same time, in the middle of the summer, there were very little reductions in Russian oil supply... We have kind of optimal supply and at the same time the Russian revenues were slashed."

Platts, part of S&P Global Commodity Insights, assessed Urals crude FOB Primorsk at an average discount of $27.8/b to date in 2023, while Far East Russian ESPO Blend crude was assessed at an average discount of $8.39/b to front-month Dubai, S&P Global data showed.

The discounts have narrowed from 2022 as Indian and Chinese demand increased. ESPO Blend was assessed at an average discount of $10.35/b last year, though compared with the 2021 average premium of $2.65/b, price differential for the Far East Russian grade has dropped sharply.

Nostrand said the Treasury had expected Russia to find ways around the price cap, in response to a question on potential concerns over the development of shadow markets, with widespread ship-to-ship transfers to mask the origin of the oil to get around these sanctions.

"It's not a surprise to us that in response to the price cap, Kremlin was going to invest in ways of getting around the price cap. That is, in fact patently obvious that they will find ways as is often the case with sanctions regimes," Nostrand said.

"Russia is making less money on its oil and is forced to spend more money getting around the sanctions... And that's really the goal of what we're putting together here."

Although the US Treasury is not dismissing the possibility that the price cap would be adjusted according to industry needs.

"The coalition generally continues to watch market conditions closely, continues to engage with many folks in the sector," Nostrand said in response to a question on if the US would raise the price cap given the industry's skepticism of its effectiveness.

"[The price cap] is a new and innovative tool in economic statecraft. We are looking forward to engaging with all of you to learn how the market is taking it in, and in response to that we do want to be nimble."

The price cap of $60/b on seaborne Russia-origin crude oil was introduced by the US-led G7 coalition in December 2022, following a similar unanimous decision by EU member countries.

In February this year, a $100/b price cap was introduced on Russian product imports that typically trade at a premium to crude such as diesel, while a $45/b price cap was put in place on products such as fuel oil that generally trade at a discount to crude.