The orchestrated European Union’s sanctions against Russian oil takes effect today, and observers say energy markets may be headed for uncharted waters in the months ahead.
Last week, EU officials agreed to set a price cap on Russian oil at $60 a barrel even as OPEC+ met yesterday Sunday to discuss crude production.
The sanctions include:
All things being equal, starting today, 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.
Analysts are of the opinion that with the majority of the world’s seaborne shipment services based in Europe, the ban would touch nearly every tanker across the globe.
Insiders say 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 the oil price cap will operate?
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.
EU, US and their allies have agreed that ships loaded with Russian oil before December 5 and unloaded at destinations before January 19 won’t be subject to the price cap.
Energy Aspects analyst, Amrita Sen has posited that the EU ban on Russian oil supersedes a price cap. 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 repeatedly said it won’t sell oil to any price-cap participants. Top buyers, China and India, are not likely taking part, and the discounted prices they pay are already around $60 a barrel.
Observers said last weekend that a “dark fleet” of ships is also poised to help Russian supplies skirt EU sanctions.
The 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 newsmen that a price cap could be easily circumvented because of questionable reporting requirements.
As it is, buyers may be on the lookout for evidence that an oil shipment is sanction compliant, 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.