Oil prices rose on Monday as the first strong measures to limit Russia’s oil profits from the war in Ukraine went into effect, bringing uncertainty about how much crude could be lost to the world economy through new sanctions or Russian retaliation. .
International benchmark Brent crude rose 2 percent to $87.30 a barrel, a day after the OPEC+ alliance of oil producers, including Russia, made no changes to supply plans because of the impact of new restrictions. on Russian oil is still unclear. Starting Monday there is a European Union embargo on most Russian oil and a $60 a barrel price ceiling on Russian exports to other countries imposed by the Group of Seven democracies and the EU.
The EU ban on Russian oil moving by sea is “by far the biggest step to date to cut off fossil fuel export revenues that finance and enable Russia’s barbaric invasion of Ukraine,” Lauri said. Myllyvirta, a principal analyst at the Center based in Finland. for Research in Energy and Clean Air.
“It took a long time to get here, but this is arguably one of the strongest responses to Putin’s war in Ukraine,” Simone Tagliapietra, an energy policy expert at the Bruegel think tank in Brussels, tweeted.
Western leaders walk a fine line between trying to cut Russia’s oil revenue and preventing an oil shortage that would drive up prices and worsen the inflation that ravages economies and hurts consumers around the world. But Russia has said it will not sell oil to countries that abide by the cap, which could drive oil out of global markets and raise energy costs, including gasoline at the pump.
Kremlin spokesman Dmitry Peskov, asked in a conference call about how the oil price cap might affect the war, said: “The economy of the Russian Federation has the necessary potential to fully satisfy all needs and requirements in the framework of the special military operation, and such measures will not affect this.”
The United States, the European Union and allied countries have hit Russia with a series of sanctions targeting banking and financial transactions, technology imports and regime-linked individuals. But so far, those sanctions have for the most part not been directly targeted at the Kremlin’s biggest moneymaker, oil and natural gas.
Europe was heavily dependent on Russian oil and natural gas before the war and has had to struggle to find new supplies. Previously, the EU banned imports of Russian coal and the US and UK stopped their limited imports of Russian oil, but those measures had much less economic impact.
Even as Western customers shunned Russian oil, higher prices fueled by fears of energy shortages helped offset lost oil sales, and Russian exporters have adjusted by sending more oil to India, China and Turkey in a major reorganization of world oil flows. Russia’s economy has contracted, but not as much as many expected at the start of the war nearly 10 months ago.
One unknown is how much of the oil that was previously sold to Europe can be diverted. Analysts believe that many, but not all, of those Russian barrels will find new homes, reducing supplies and driving up prices in the coming months.
India’s Foreign Minister Subrahmanyam Jaishankar indicated on Monday that the country will continue to buy oil from Russia to prioritize its own energy needs. India has also so far not committed to the G-7 price cap.
The cap has a grace period for oil that was loaded before Monday and reaches its destination before January 19 to minimize disruption to oil markets.
The price cap would work by preventing insurers or shipowners from helping move Russian oil to non-Western countries unless the oil price is below the cap. Most of those companies are located in the EU or the UK, which puts them under a variety of restrictions.
The idea is to keep Russian oil flowing while Kremlin revenue is reduced, although the immediate impact may be limited because Russian oil was already trading around where the ceiling was set. The US and Europe decided to be more inclined to avoid a price increase than to cause financial problems in Russia, although the limit could be tightened later.
European Commission Vice President Frans Timmermans said Monday that “we agree that we must not disrupt international oil markets. That wouldn’t help us either.” That is why the EU decided that the “correct price” was $60 per barrel.
Ukraine’s President Volodymyr Zelenskyy had called for a cap of around $30 a barrel. That would be close to Russia’s cost of production, allowing Russian oil companies to earn enough just to avoid plugging wells that may be difficult to restart. Russia needs between 60 and 70 dollars a barrel to balance its budget.
A wild card is Russia’s response. If he follows through on a threat not to sell oil to countries that observe the cap, that could limit supply and raise prices, benefiting Russia to the extent that it can evade the restrictions.
Russia could use methods like those employed by Iran and Venezuela to circumvent sanctions, such as the use of “dark fleet” tankers with obscure ownership and ship-to-ship transfers of oil to tankers with similar quality oil to hide its origin. Russia or China could also arrange their own insurance. Sanctions experts say those steps will impose higher costs on Russia.