Prof. ST Hsieh
Director, US-China Energy Industry Forum
626-376-7460
December 2, 2022
Works or not, the US led EU sanctions on Russian Oil with price cap will be “enforced” on December 5, 2022, three days away. There are many unknowns and risks so this unprecedented sanction may not yield any real results.
The real danger to the world is that this price cap scheme somehow worked. Because “price cap” is an anti-market system or against global free trade.
Specifically, according to the US Treasury Department: oil price cap ‘institutionalizing’ Russian crude discounts, if it works, of course. Russia is a sovereign nation and a major crude oil producer in the world, if this Price Cap scheme works then it means that the US led EU as a “block” will be able to determine/control the price of Russian oil. Further, crude oil is a major commodity with a very active global commodity market. Crude oil prices, by and large, are determined by supply and demand. With this Price Control scheme, the US government sets the price! If it works this time, the US will be emboldened and who knows when and what next commodity will be “price controlled?” The US and EU will control the global economy!
There is no telling, if the price control schemed worked and Russia’s economy is severely constrained, what retaliation will Russia take against the US and EU? Russia does not have the ability to influence the global economy, then what?
The net result will be a dangerous world, and no one is safe.
EU sanctions on Russian oil take effect on Monday – here’s what to expect and why the price cap may not yield any real results
Brian Evans Fri, December 2, 2022 at 9:21 AM
- The European Union’s sanctions on Russian oil shipments will take effect on Monday.
- EU officials have agreed to set a price cap on Russian oil at $60 a barrel.
- The US has said ships loaded with Russian oil before December 5 and unloaded at destinations before January 19 won’t be subject to the price cap.
The European Union’s sanctions on Russian oil will take effect on Monday, and energy markets are headed for uncharted waters in the months ahead.
Meanwhile, EU officials have agreed to set a price cap on Russian oil at $60 a barrel as OPEC+ meets Sunday to discuss crude production, adding more uncertainty to the immediate future.
What do sanctions include?
Starting Monday, seaborne imports of Russian oil into the EU will be banned, as will European insurance and shipping services for vessels carrying Russian oil anywhere in the world.
With the majority of the world’s seaborne shipment services based in Europe, the ban would touch nearly every tanker across the globe. That means even ships transporting Russian oil to markets outside the EU will not be able to access services provided by EU companies.
The EU sanctions exempt imports delivered via Russia’s Druzhba pipeline to certain landlocked countries in Central Europe — a concession to Hungary, which is led by Vladimir Putin ally Viktor Orban.
How would the oil price cap work?
At the same time, the EU, G7 member countries, and Australia are participating in the price cap on Russian oil. EU diplomats reached a deal on $60 per barrel on Friday, despite efforts by Poland and Baltic states for a lower cap.
By essentially watering down the EU sanctions, Western powers hope to ensure that Russian oil keeps flowing — simultaneously preventing a price shock while limiting Russian revenue. Insurance can still be provided to tankers carrying Russian barrels so long as the crude was purchased at or below the cap.
But the EU ban on Russian oil supersedes a price cap, Energy Aspects analyst Amrita Sen has pointed out. So while Russian oil priced below the cap could flow via EU ships and insurance outside the EU, the trading bloc itself still will not import seaborne Russian crude.
What will happen to oil prices?
Russia has said it won’t sell oil to any price-cap participants. Top buyers China and India haven’t said they will take part, and the discounted prices they pay are already around $60 a barrel. A “dark fleet” of ships is also poised to help Russian supplies skirt EU sanctions.
But 2.4 million barrels of Russian oil that once flowed to the EU per day will have to find new destinations, and Asian markets are unlikely to pick up all the slack. Top oil trader Vitol predicted Russian oil exports could fall by up to 1 million barrels per day, or 20% of its seaborne volume.
Analysts at Bernstein estimated that oil prices could jump to $120 a barrel next year, as Russia struggles to find enough dark ships willing to operate without Western insurance.
Kpler lead crude analyst Viktor Katona told Insider that a price cap could be easily circumvented because of questionable reporting requirements.
Under the current framework, buyers are on the hook to provide proof that the oil in question complies with EU sanctions, while “for every other entity along the trading transaction there is no such necessity,” he said.
The cap also conflates “free-on-board” prices with destination prices, which has already allowed Russia to underreport prices, Katona said. FOB refers to the specific time during shipping when either the buyer or seller becomes liable for the goods. A cap that’s set as a FOB price would represent “very porous regulation,” he added.
U.S. Treasury says oil price cap ‘institutionalizing’ Russian crude discounts
Fri, December 2, 2022 at 2:33 PM
NEW YORK (Reuters) – The European Union’s agreed $60 per-barrel price cap on Russian seaborne crude oil will keep global markets well supplied while “institutionalizing” discounts created by the threat of such a limit, a senior U.S. Treasury official said on Friday.
“By setting the price at $60 per barrel, we’re institutionalizing the steep discount at which Putin has been forced to sell Russian oil, a discount that exists in part because the threat of the price cap has forced Russia to offer bargain deals to importing countries,” the official said.
US Seeks to Reassure Oil Market Before Russian Price Cap Hits
Daniel Flatley and Christopher Condon Fri, December 2, 2022 at 3:25 PM
(Bloomberg) — Biden administration officials are trying to reassure oil market participants that the newly agreed $60 price cap on Russian crude won’t trigger supply disruptions and price volatility after it kicks in Monday.
Those who watch the issue carefully have raised the risk of “over-compliance,” in which companies not prohibited by law from working in a given area nevertheless exit entirely due to concerns about violating US policies, or for other reasons like reputation risks.
A senior Treasury official acknowledged the unprecedented nature of the price cap during a call with reporters on Friday, but said the US has tried to counter that by engaging extensively with industry players ahead of the implementation. The countries in the price cap coalition have tried to make the policy as easy as possible to follow, the official said, speaking on condition of anonymity due to the sensitive nature of the talks.
“One of the big potential issues is going to be over-compliance, intermediaries deciding that the risk is too great and not engaging,” said Adam M. Smith, a partner at Gibson, Dunn and Crutcher and a former adviser at Treasury’s Office of Foreign Assets Control, which oversees sanctions. “Banks have historically been very risk-averse — as they should be — in the sanctions space and I think over-compliance in that context can be expected.”
It will take market participants, including shipping firms and trading houses, some time to understand the compliance issues, said Helima Croft, chief commodities strategist at RBC Capital Markets LLC, given the cap was agreed by EU and G-7 members only days before its implementation, alongside associated EU sanctions to restrict Russian oil sales.
“It’s not necessarily clear how you can have this simultaneous launch of the price cap and the sanctions on Monday,” she said. “I wonder if we might have near-term disruptions as legal departments wade through the questions of whether they can really do this trade.”