In the weeks following the cap, Russia sold its crude oil for about US$74 per barrel on average
The ultimate impact of the western price cap on Russian crude export earnings remains an interesting point of discussion. Opinion is divided.
After some bickering, on Dec. 5 of last year the European Union (EU) finally agreed on a price cap of US$60 on Russian oil exports. That same day, the European Union banned seaborne imports of Russian crude oil and barred European companies from insuring Russian oil consignments selling above the price ceiling.
But according to calculations from academics at the Institute of International Finance, Columbia University, and the University of California, Russia took in more money in the weeks that followed the oil price cap.
Their paper Assessing the Impact of International Sanctions on Russian Oil Exports indicates that Russia sold its crude oil for about US$74 per barrel on average – well above the EU ceiling.
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“We find that Russia was able to redirect crude oil exports from Europe to alternative markets such as India, China, and Turkey.” And, although the report said that Russian earnings got a hit due to the sizable discounts it had to offer, it went on to say, “we do not find crude oil discounts as large as those reflected in Urals prices toward the end of 2022. In particular, prices in market segments that are unaffected by lower European demand, e.g., exports from Russia’s Pacific Ocean ports, have not dropped in a meaningful way and shipments do not appear to comply with the (EU imposed) price cap,” Oilprice.com said in its piece on the subject.
Covering the four weeks following the implementation of the price cap in December, the report added: “Moreover, our surprising finding of a significant share of Russian crude oil (still) being sold well above the price cap level of US$60 a barrel urgently calls for further investigation of these transactions and reinforces the need for stepped-up enforcement,” the authors added, recommending ‘the price caps on crude oil should be lowered as soon as possible.”
Bloomberg also reported that the discount Russia was offering to its major buyers was not as high as was being reported in the press. In a report about Chinese imports of Russian crude, Bloomberg noted, “Urals and ESPO crude were pegged at a discount of US$13 and US$8 a barrel, respectively, to Brent on a delivered basis.”
Oiprice.com’s Irina Slav recently wrote that Brent currently trades above US$80 per barrel. Therefore, a US$13 discount would be higher than the US$60 price cap that G7 and the EU set for Russian crude oil if it is to be shipped by Western tanker operators and insured by Western insurers. So, she argued, if the numbers cited by Bloomberg, based on reports from traders, are accurate, then a certain amount of Russian oil is not selling at such steep discounts.
In a report earlier this month, the International Energy Agency (IEA) also expressed almost the same belief, conceding that both the Russian oil output and its exports have proven surprisingly resilient to Western sanctions. Toril Bosoni, head of the IEA oil industry and markets division, told CNBC that while Russian oil output had only fallen by 160,000 bpd from pre-war levels, and exports were down by 400,000 bpd – a decline partially offset by higher exports to China, India, and Turkey – sanctions are working, especially the G7 price cap because Russia is making less money from its oil.
However, the discount Russia offers to its clients is also decreasing for several reasons, including new, opaque oil trading firms, a large fleet of tankers, and a lot of oil trade in currencies other than dollars and euros.
Energy Intelligence reports that new trading houses, set up in recent months outside Europe and not obliged to trade in dollars or euros, quickly replaced oil majors – Vitol, Trafigura, BP, Shell, Equinor – which were obliged to quit the Russian market due to the western led sanctions on Russian crude exports. Energy Intelligence further reports that banks in the United Arab Emirates and Turkey are financing these sanctions-busting trading houses. As Energy Intelligence puts it, European banks and commodity traders remain “out of the picture.”
Markets always find their way of doing work. The invisible hand is always at work. And Russian crude exports are no exception to the golden rule.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. Energy and the Middle East are his areas of focus. Besides writing regularly for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.
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