Explanation: The G7 maximum price on Russian oil is starting to take shape

A 3D printed oil barrels model is seen in front of the displayed stock chart going down in this illustration taken, December 1, 2021. REUTERS / Dado Ruvic / Illustration / File Photo

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WASHINGTON, Sep 12 (Reuters) – Group of Seven countries are working to limit the price of Russian oil in an attempt to limit Moscow’s ability to finance the invasion of Ukraine, a plan analysts say could work in the long term but could increase. oil prices in the coming months.

Officials from G7 countries, including US Treasury Secretary Janet Yellen, say the unprecedented measure, which begins December 5, will reduce the price Russia receives for oil without reducing its oil exports to global consumers.

Russian President Vladimir Putin could push back, causing stress on the oil markets even if the plan materializes.

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Below are questions about the price limit and the challenges it faces.

WHO IS IN THE PRICE CAP COALITION?

The rich nations of the G7 – the United States, Japan, Germany, Great Britain, France, Italy and Canada – and the EU are working out the details of the plan. The G7 wants to enlist other countries, including India and China, which have bought heavily discounted oil from Russia since the February 24 invasion of Ukraine.

Moscow managed to maintain its revenues thanks to the increase in crude oil sales in India and China.

But even if India and China don’t unite, a cap could help lower prices for Asia and other consumers. On September 9, US Treasury Deputy Secretary for Economic Policy Ben Harris said that if China negotiates a separate 30% -40% discount on Russian oil due to the high price, “we consider it a win.”

Consensus on the level of the price cap will be reached with the help of a “rotating lead coordinator,” the US Treasury Department said on Friday, suggesting that the coalition countries will take a temporary leadership role as the slowly proceeds.

WHAT IS THE CAP PRICE LEVEL?

It will likely be weeks before the price of Russian crude and two petroleum products is decided, Harris said.

Washington-based ClearView Energy Partners said officials have been talking about a $ 40- $ 60 a barrel range for crude oil. The upper end of that range is consistent with historical Russian crude prices, while the lower end is closer to Russia’s marginal cost of production, analysts say. Read more

Coalition members with long economic and military relations with Russia could push for a higher limit, while too low a limit could steal market share from Saudi Arabia and other oil producers. “The level will be determined by both quantitative and qualitative reasons,” said Bob McNally, president of Rapidan Energy Group.

The price of Russian crude oil is discounted compared to the international Brent benchmark and the G7 wants to keep this wide spread, to contain Russian oil revenues.

However, achieving a large spread could mean higher prices for Western consumers as Russia is the second largest crude oil exporter in the world, after Saudi Arabia.

WHAT DOES THE G7 EXPECT FROM MARITIME SERVICES?

The plan agreed by the G7 requires participating countries to deny Western-dominated services, including insurance, finance, brokerage and shipping, to oil cargoes priced above the limit. Read more

To secure such services, oil buyers allegedly made “claims” to suppliers claiming that they bought Russian oil at or below the limit.

Marine service providers will not be held liable for false pricing information provided by buyers and sellers of Russian oil, the US Treasury said. Read more

G7 officials believe the plan will work because the London-based International Group of Protection & Indemnity Clubs provides maritime liability coverage for approximately 95% of the global oil fleet.

Traders point to parallel fleets capable of handling Russian oil using Russian and other non-Western insurances that could be used to evade law enforcement efforts. Read more

It remains uncertain how many ports in the world will accept Russian-insured ships.

Craig Kennedy, an associate at Harvard University’s Davis Center for Eurasian and Russian Studies, said the G7 has long-term leverage because Moscow is constrained by a small fleet of tankers versus the large scale of exports it needs. to exit. If Russia does not want to sell to the limit, it may have to shut down production, which could impose long-term costs on its oil fields.

HOW COULD IT CONTRAST RUSSIA?

Putin said Russia will hold back exports to countries that apply the limit and fears of the threat could drive oil markets up before December.

Higher prices could also be risky for US President Joe Biden ahead of November’s midterm elections, when his fellow Democrats hope to retain control of Congress.

Some analysts fear Moscow may respond by taking action beyond Russia’s borders before the cap goes into effect.

“My biggest concern is that Putin will make everything very, very painful on the way to December 5,” said Helima Croft, head of global commodities strategy at RBC Capital Markets, at a Brookings Institution event on September 9. They also have resources in other producing countries, whether it’s Libya or Iraq, and they have the ability to cause some problems in other producing states. “

HOW WILL THE CAP BE APPLIED?

The US Treasury has warned utility companies to pay attention to red flags indicating potential tax evasion or fraud by Russian oil buyers. These could include evidence of misleading shipping practices, refusal to provide requested pricing information, or excessively high service costs. Read more

US Deputy Treasury Secretary Wally Adeyemo said Friday that those who falsify documentation or otherwise conceal the true origin or price of Russian oil would face consequences under the domestic law of jurisdictions that implement the price cap.

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Reporting by Timothy Gardner; Additional reports by David Lawder and the London energy team; Editing by Daniel Wallis

Our Standards: Thomson Reuters Trust Principles.

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