UK shipping insurance ban for Russian oil paves way for G7 price cap

The UK's incoming ban on providing maritime transport services for shipping of Russian oil will be a key plank of the G7's planned price cap, severely limiting Moscow's access to the global tanker fleet unless there is compliance with the cap.

The UK introduced legislation Nov. 3 that will prevent UK ships and services from facilitating the maritime transport of Russian crude from Dec. 5, although vessels that comply with the price cap -- details of which have yet to be finalized -- will be exempt under the terms of a general license.

The UK is a global leader in maritime insurance, writing 60% of protection and indemnity (P&I) cover. Insurance is one of the key services that enables the movement of oil by sea, particularly P&I insurance which relates to third-party liability claims.

"The ban on services, including insurance, brokerage and shipping... lays the basis for an Oil Price Cap exception that will allow third countries to continue accessing services only if purchasing Russian oil at or below the cap," the UK Treasury said in a statement. "The level of the price cap will be set by the coalition in due course," it added.

The price cap is set to take effect in coordination with the EU's plan to ban, as of Dec. 5, the import of seaborne Russian crude oil and the provision of insurance, trade finance, banking, brokering, navigation and other maritime services by EU companies for the transport of Russian crude to any location. A prohibition on refined petroleum products is set to kick in Feb. 5.

The G7 confirmed in a statement Nov. 4 that the implementation would be confirmed in the coming weeks. It called on oil-producing countries to increase production to "decrease volatility in energy markets."

Russian oil supply disruptions are seen hitting 1.5 million b/d in February, according to S&P Global Commodity Insights analysis, due to the impact of the EU sanctions and price caps that are set to be enforced.

Russia is a significant supplier of oil to the world, exporting more than 7 million b/d of crude and petroleum products, or some 13% of the total oil trade.

Russia's shrinking fleet

Russian seaborne exports are heavily reliant on EU and G7-owned or managed tankers. This means that Russia could struggle to transport its oil with some analysts suggesting the ban may nudge Russian barrels towards meeting the price cap and thus accessing mainstream maritime tonnage and services.

One possible alternative to this is state-issued insurance provided by Asian countries such as China, maritime sources have said. In the past, some Asian buyers have provided sovereign insurance for other sanctioned crude oil imports, such as Iran and Venezuela.

The implication is that these vessels will now need to be replaced by tankers that can avoid doing business with the EU and this will tighten availability in a small subset of the market. Left with few options, this raises the possibility that more rather than less Russian oil will be sold under the yet-to-be defined G7 price cap, analysts said.

Analysts at JP Morgan said Russia is running short of tanker capacity, which could prompt production cuts of similar magnitude this year and next.

"By Dec. 5 Russia will need to not only find alternative markets for the 4.1 million b/d of crude oil and products sold to countries that have already imposed embargoes on Russian oil imports but will also need to secure insurance and tanker capacity to ship the other 2.9 million b/d to those who are currently purchasing Russian oil using Western tankers and services," they said in a recent note.

Analysts at Gibson Shipbrokers said that the balance of tonnage in both the Russian and non-Russian trading fleets will be critical for the strength of the mainstream crude markets. "Ahead of Dec. 5, it is expected that many companies trading with Russia will pull back to ensure all Russian cargoes on board have been discharged by the deadline and migrate back into non-Russian trade," it added.

Russian seaborne exports of crude and oil products have been steady in recent months, with an increase in crude flows despite incoming EU sanctions offset by a fall in product exports from Russian ports, 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.

China and India remain the main destinations for Russian crudes in the wake of the Ukraine war, accounting for 58% of all seaborne Russian crude exports in October.