Yves here. This post describes some of the too-obvious signs that the notorious Russian oil price cap was not terribly well thought out. I have to confess I had forgotten that I had learned back in 2008, during the debate over the big oil price runup in the first half of that year, that Saudi oil price sales were based not on spot but an average of specified futures prices to impede manipulation. It appears similar mechanisms are widely used now. The article below discusses how pricing is not done at a fixed amount but in reference to floating prices, so participants in a transaction can’t be certain if the price was below the present $60 cap or not.
In other words, the idea of a predetermined price level was goofy, but apparently Janet Yellen couldn’t be bothered to understand the market she planned to meddle with.
A second issue is that not only will member states participating in the oil price cap scheme not insure Russian cargoes sold at above-the-cap prices, but the tankers themselves are supposedly forever barred from getting maritime services from member states. As the article notes, Russia has a fleet it’s readied for its shipments; Alexander Mercouris said China also has some of its own tankers. The article note that there was a tanker jam at the Dardanelles due to the new rules. But again per Mercouris, it wasn’t Russian tankers that were held up but apparently ones carrying oil from the ‘Stans. Turkiye does not want uninsured tankers passing through its waters. I’m not sure what the precise concern with the non-Russian tankers was, but bear in mind the new rules do not allow for mixing Russian oil with other oil and calling it non-Russian. All that is allowed is incidental residues.
Of course, there is the wee issue that Russia has said it is not selling oil to any country that participates in the cap.
Oil is now trading at the lowest level of the year, and some are using that along with the initial fall in Russian oil sales (16% per one source, 50% per another, which is quite a spread). However, cargoes that launched before December 5 were excluded from the cap, so it isn’t hard to imagine that there was a bit of a rush to buy before the cap was in place. In addition, demand from China is still weak due to its navigating Covid (despite Western press blaring to the contrary, China has relaxed, not ended, its Covid curbs). So if and when demand from China picks up, so to will oil prices, and direct buys from Russia. In other words, it’s too early to tell what the impact on Russia v. the cap-imposers will be.
By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice
- While a $60-per-barrel oil price cap may sound straightforward, implementing it in what is a complex market could get very messy.
- Physical oil is nearly never traded at fixed prices, instead being sold at a premium or discount to the forward prices of major benchmarks.
- Traders are now worried they might inadvertently violate the cap while banks are increasingly worried about the high compliance risk.
The $ 60-per-barrel price cap on Russian crude oil, which came into effect on Monday, looks pretty straightforward. Buyers paying $60 or less per barrel of Russia’s crude will have full access to all EU and G7 insurance and financing services associated with transporting Russian crude to non-EU countries.
However, the physical oil market doesn’t usually see trades with fixed prices of crude – oil is being sold at a price premium or discount against the forward prices of the major international benchmarks such as Brent or the Oman/Dubai average.
So, the price cap is much more complicated than a straightforward $60 per barrel ceiling.
As a result, traders of physical oil cargoes are confused by the price cap on Russian crude, wondering how a fixed price would work in a market that trades oil on a forward floating basis against international benchmarks. Physical oil traders, those who are willing to trade crude in compliance with the price cap, are also concerned that they could end up inadvertently violating the cap if, for example, the price of Russia’s flagship grade, Urals, with a discount to Brent, is higher than $60 per barrel weeks after the oil trade has been made.
In such cases, traders would be stuck with above-$60 Russian crude that violates the price cap and would significantly limit access to EU/G7 tankers and maritime transportation services such as insurance and financing, oil traders tell Bloomberg. This could complicate the physical handling of Russian crude oil cargoes and hedging, they say.
“Physical traders rarely trade on a fixed price,” John Driscoll, chief strategist at JTD Energy Services Pte Ltd, told Bloomberg.
“It’s a much more complex space where they trade on formulas and spot differentials to a benchmark crude for the trading of actual cargoes as well as for hedging that follows,” said Driscoll, who has more than 30 years of trading oil in Singapore.
The price cap is not set in stone – it “is fixed for now but adjustable over time,” the EU said last week.
A price revision would “take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, the potential impact on coalition members and partners, and market developments,” the EU says.
Even within the price cap, banks are generally wary of providing financing, industry officials told Global Trade Review this week. Banks are concerned by the high compliance risk and fear they will have to increase scrutiny and due diligence to avoid being caught in a trade or deceptive shipping practices.
Adding further confusion for physical oil traders is Russia’s position on the matter. Moscow says it will not trade its oil with countries that have joined the price cap.
The EU says that “With the price cap, there are clear incentives for Russia, oil importing countries and market participants to maintain the flow of Russian oil. This will achieve both objectives at the same time.”
But Russia says the price cap artificially limits prices—a mechanism Moscow will not accept.
By the end of this year, Russia expects to have legislation prepared that will ban Russian companies from selling oil to countries part of the Price Cap Coalition, Russia’s Deputy Prime Minister Alexander Novak said on Tuesday.
Russia is also preparing a response to the EU embargo and the price cap, Kremlin spokesman Dmitry Peskov said on Monday.
“One thing is obvious – we will not recognize any price caps,” Peskov added.
There are signs on the market that Russia and less scrupulous tanker owners have been amassing a large ‘dark fleet’ of tankers to ship Russian crude outside the price cap and any EU/G7 insurance and financing provisions. The tankers may not be enough to ship all the Russian oil previously sold in Europe, and Russia could struggle to place all its previously Europe-bound oil to other markets, such as its now biggest customers, China, India, and Turkey, analysts say.
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From a purely intellectual perspective, I guess this will in part provide a test of how much the G7’s insurance and maritime services really do possess a de facto global monopoly, what alternatives already exist and if not how easy they are to replicate. Instinctively, one suspects that all of this is doable.
I had totally not realised too that oil is traded at a delta to a benchmark in the same way that many other quasi commodities such as wheat are also often priced in contracts.
Quite shocking though that the people creating this price cap either did not know, did not listen to people who told them (hard to believe there was not an attempt to inform them somehow) or just did not care.
I guess that conceptually Russia can make more money from selling less oil at a higher price, given overall demand inelasticity. As long as OPEC continues not to ramp up production to suit the G7.
We do seem to be in a world of “feel good” western policy making. That usually does not win wars.
This is interesting because so much of the periphery of this conflict (sanctions, etc) are boiling down to the G7 betting the effective monopoly they had in trade and finance. There was no reason that the US had to lose significant global power because of a war on eastern Ukraine. It could have let things play out and said, “well we tried to help the Ukrainians but they lost. We’ll slap some sanctions on Russia and talk about how evil it is.”
Are the leaders that concerned with the precariousness of the US position in the short/medium term? Are they so tied up in personal ideology that it trumps the long term national interest? Are they just so arrogant and ignorant that they’re incapable of analyzing the larger context? Are they just so short-term focused that they are blind to medium and long term effects?
They could have tried to throttle Russian trade/revenue slowly and quietly and they probably would have been more effective. Instead they blared unrealistic expectations through the media. Even the idea that the US planned to make the EU more dependent on it stops making sense with how ham handed the process has been implemented. Stupid or evil? Probably evil but also stupid.
Aurelien’s trying to answer such question:
https://aurelien2022.substack.com/p/peter-pan-goes-to-ukraine
Aurelian’s points can equally apply to today’s Buzzfeed article too!
I am not the only one who shakes my fist at the flipflop-ification of the world, lol!
(sorry to hear the Europeans caught the flip-flop mind-virus of America)
I agree. Lots of similarities with the dollar situation too, although as Yves says in the other piece, that is far more sticky.
However, if Russia and China end up being driven into a mutual autarky that does not trade / exchange assets with the U.S. / dollar world then that could be a way that the dollar might start to unravel as global reserve currency.
However, I fully agree with Yves that this will not happen tomorrow, or even ever. But Cold War 2.0 changing the fundamentals of trade flows and the dynamics of cross country asset holdings would be a way that this might happen. Not just playing around with the currencies used for existing trade flows, which ultimately just get converted back to dollars if that is what sellers want to hold.
Yes. TPP was basically the recognition China was beating our brains in. Obama was desperate to cut the Chinese out and more or less promised anyone who signed up would not have to follow any kind of regulations. They just needed to not trade with China.
Russia is nearly a smaller US with an air force that is actually defense oriented. Iraqis need not fear Russia invading, but as was shown in Syria, the US wouldn’t move against Assad. The Russians aren’t stealing Syrian oil.
Turkey and Brazil regardless of leaders are showing the changes. The US has burned all of its soft power. One of the arguments that was widely shared for Obama over Hillary was he would let the US rebuild soft power, hence his banalities in Cairo. Obama didnt lead on climate and turned to warfare as soon as he realized being president was hard.
The dollar may be safe, but the old GE is dead. And it was only 10 years ago, the Obama administration was pushing that idiot Immelt as their jobs czar. The state of US corporations is largely based on past glories and inertia. Tech has had success because of early investments in what we colloquially call the Internet, but the kids are on TikTok these days.
« TPP was basically the recognition China was beating our brains in. »
Are they? Seems depends on how these things are measured and who « we » are. See the following:
https://twitter.com/RnaudBertrand/status/1600606618785353745
Lex asks “Are they so tied up in personal ideology that it trumps the long term national interest?”
I do not think those who are responsible for these decisions care about national interests. Understanding what their goals are would make the recent craziness understandable. It seems clear to me that they do not represent the interests of the US electorate, but control the Fed, military, Congress, and the executive. And media, except here and a few other location. In my limited and faulty view, the Balkanization of all nations (US included) is their aim now.
‘Physical oil traders, those who are willing to trade crude in compliance with the price cap, are also concerned that they could end up inadvertently violating the cap if, for example, the price of Russia’s flagship grade, Urals, with a discount to Brent, is higher than $60 per barrel weeks after the oil trade has been made.’
Maybe that is why it was set up the way that it was – with all sorts of inbuilt uncertainty. Traders would be nervous about falling afoul of some obscure proviso or unexpected eventuality as that would bring the legal force of the US/EU down on them. So for a trader, it might be in their own interest to have nothing to do with Russian oil in any shape or form. Mind you, if these oil caps are effective for awhile, the US/EU may get a glimpse of what an oil market without Russian oil would look like. But for the moment I wonder if OPEC will weigh in and announce a cut in oil production or something as they have a lot to lose with the concept of the G7 setting the price of oil.
Opec+ said they’re keeping production at current levels until early next year as the impact of the October output cut is still unclear, but remain open to the possibility of adjusting output before then should extraordinary circumstances necessitate a response. One thing to also keep in mind is Russia is yet to announce its countermeasures to this price cap scheme, so the flight path of this price cap is even more uncertain when one factors in the fact that patience has been the calling card of the Russians so far, and we’ve seen how this approach has made the blowback risk of ill-conceived sanctions asymmetrical for the west.
I agree with The Rev Kev – I think the uncertainty is a feature not a bug and it is designed to get everyone to stop buying Russian oil.
Now, given that prices are manipulated (or at least tried for such a manipulation) for geostrategic reasons and we can decide when do not like “free markets” this should open the door to other manipulations for better reasons let’s say, for instance, welfare of the citizens at large and basic needs supplies regarding for instance food, health treatments and, not the least, housing which is of course another essential item. If there were clever leftists in any political party this might give a powerful tool to fight for certain rights and let some goods and services out of the free market spree and put caps to house rents, essential foods, health treatments, law services and others that might be considered essential.
An objective was to keep overall Russian sales from falling enough to spike the price of oil. A complex and uninformed Western scheme to confuse markets can’t work without reducing Russian oil exports. The original shock and awe sanctions campaign failed, and this will also.
The ex communists seem to believe more in market efficiency than the west.
My guess is the reason russia is buying cheap older tankers that don’t have long to live is that they are busy building pipelines to China for both oil and gas. This would mean cheaper than Persian gulf sourced energy for China, more expensive PG energy for eu. China becomes more competitive, eu less so.
Eu seems to be the casualty here, us not so much affected, and us might gain some of eu’s industry. But how much will go there? Labor is higher in us than in many low cost energy producers… and worse, there’s little available skilled labor in us. Can German industry bring their labor? Even if so, labor would be pricey. Maybe better to move to where both labor and energy is cheap, I.e. follow us example over past 40 years. If so, row also gets some of eu’s industry.
Bottom line is at best us gets a little stronger but eu much weaker, so the west as a whole is weaker vs row. Imo there’s more evidence every day the world is splitting into a west vs the rest trade blocks, and the rest have most mfg and commodities, not least energy. What does the west export? Pricey weapons, movies, patents, services such as FIRE. Not much row can’t either do better or simply take.
Seems more piss-poor dc planning.
The US leadership class has had life on easy mode for far too long and now think they are geniuses based on what is essentially now just their good fortune.
Hunter S. Thompson’s reports of heavy drug use by the political classes is looking increasingly accurate. It’s probably worse today due to the wide and easy availability of SSRI’s, ADD medicines, and legal pot. It’s not just Biden and Harris that seem to live in alternative worlds with entirely different (and much happier) sets of facts, but it also extends into the federal bureaucracy, people who used to be the sober stewards holding things together behind the scenes.
What they may be trying to do here is cause utter chaos in the oil market to make their “sustainable” technologies (which aren’t really sustainable when you dig in) compare better. Unfortunately, there is nothing like petroleum based fuels in terms of cost and energy density. The BRICS can’t afford to give up petroleum fuels and the oil rich countries can’t afford to stop selling them. This makes their expensive and lower utility sustainable substitutes look bad in comparison, so by causing chaos in the oil market they think they can push their agenda forward. They are pushing this agenda not because it’s genuinely virtuous, but because they own it and want to force the word on to their monopoly.
What we are seeing from the Western leadership class is nothing short of drug supported depravity and delusion.
I don’t know anything re their drug use. But us leaders have been on top since 1945, or 75 years. Even for 80 year olds it’s all they know. Of course they think it’s true now, and us must make the rules, and us pres must now and forever be leader of the free world. The free world is and will forever consist of those countries that accept the us makes the rules that followers must follow without question, as eu is doing now. All others are the enemy subject to any and all sanctions.
Biden said it himself: yes, there is a new world order, and the us must lead it… apparently not realizing that in that case it’s the same world order.
But the us shipped its mfg to China so is now a paper tiger, just like nato, granted with nukes. But nukes are suicide, so somewhat limited value in any world order. And us confiscating 300b of Russian reserves makes all holders of $ pay attention, certainly countries large and small but not least oligarchs who have noted recent confiscation of oligarch assets with great interest. Many bright minds are looking at how to divest the old maid $, imo China/Russia et Al will come up with one or more workarounds.