MOSCOW, December 5. /TASS/. The price cap on Russian oil imposed a year ago by Western countries is not actually functioning, but is unlikely to be revised in the near future, experts interviewed by TASS said.

On December 5, 2022, an embargo on maritime Russian oil shipments to the European Union took effect. The G7 nations, the EU and Australia agreed on a price cap for Russian oil delivered by sea, setting the ceiling at $60 per barrel. Moreover, since February 5, 2023 similar restrictions on deliveries of petroleum products from Russia have been enforced as the EU Council officially green-lighted the decision, in conjunction with the G7, to introduce a price ceiling on Russian petroleum products supplied by sea at $100 per barrel for premium oil and at $45 per barrel for discounted oil. In turn, Moscow said that it did not acknowledge the terms of the price cap, while Russian companies would ignore this mechanism in delivering oil to buyer countries.

"Almost all Russian exports are delivered to Asia now. And the EU’s refusal to purchase oil in Russia has resulted in the fact that prices for Russian oil are currently being formed in Asia, while for Asian purchasers the restrictions imposed by G7 countries, including the price cap, are neither important nor obligatory. This is why, speaking about the price cap, it is not currently working, with Russian oil being sold at higher prices," Sergey Kondratyev, head of the Economics Department at the Institute for Energy and Finance, said. Meanwhile, he did not rule out that the future situation would depend on fluctuations in global oil prices.

According to data provided by the Russian Finance Ministry, the average price for Russian benchmark Urals crude oil hit $72.84 per barrel in November 2023, with the discount to global benchmark North Sea Dated standing at $10.28.

"The restrictions on oil supplies are virtually non-functional as a deficit is emerging in the market, with consumers finding ways to ‘get at’ Russian oil," Maxim Malkov, head of the oil and gas advisory practice at Kept Strategic and Operational Consulting Practice (formerly KPMG in Russia), noted. That said, other suppliers cannot rapidly replace Russian fuel in Europe, he stressed, adding that gradually the region may replace up to 80% of Russian deliveries with supplies from the US and the Middle East, although prices will go up.

What about the Russian oil discount?

Meanwhile, all experts agree that the price cap and the EU’s embargo have had some effect on the Russian oil sector. Russia’s benchmark Urals crude had traditionally traded at a slight discount to Brent. After the restrictions took effect, the discount rose sharply but subsequently fell gradually to $10 per barrel. "Russian oil producers did not lose in terms of volume, although they lost temporarily in terms of price," Igor Galaktionov, investment market analyst at BCS World of Investment, stated.

Finam analyst Alexander Potavin believes that, "the price cap proved effective in the first few months after it was imposed." "Back then, the discount of Russian Urals oil to the Brent benchmark amounted to around 30-35%. Later on, Russia managed to organize channels to export its oil to China, India and Turkey at prices above the cap," he said. However, the amount of revenues generated from such oil sales can only be properly assessed by duly factoring in the prevailing ruble exchange rate, the expert added.

According to Kondratyev, the current situation is better, with the FOB-based discounts (the cost of oil before loading, which does not factor in transportation and insurance costs - TASS) at Russian ports do not exceed $14-15 per barrel. "The embargo imposed by the EU surely means that a certain discount for Russian oil will persist in the future as well, simply due to changes in the geography of supplies. Now, oil is delivered from Baltic ports to China in 55-60 days, whereas earlier it took only 3-5 days for supplies to reach northwestern Europe, which means that logistics costs are objectively higher," he explained.

Potavin thinks that the $10-12 per barrel range is the minimum discount Russian oil producers can expect. "The long transport leg and the need for an overall discount to interest Indian purchasers in buying Russian oil limit the further potential for any increase in the price of Russian oil," the analyst said. Meanwhile, sanctions are affecting the cost of logistics services, access to equipment and technologies, as well as pushing the price of oil supplies up, he added.

In turn, Stanislav Mitrakhovich, a senior expert at the National Energy Security Fund, said that in November the discount on Russian oil started rising again amid tightening pressure on carriers and insurers underwriting Russian oil shipments, although it does not remain as high as in the spring. The price of Russia’s Urals oil went down to around $60 at the port of shipment in the second half of November, he noted.

What comes next

In general, market watchers polled by TASS believe that changes in the price cap level are not likely in the near future, unlike targeted attempts to tighten sanctions.

"I think that amid the current environment, the US and EU countries will most likely take a pause: The price cap is unlikely to be raised now that global oil prices are volatile, while Urals is trading only $1-2 higher than the price cap, since this would immediately lead to a contraction of differentials for Urals, being regarded by the market as the ‘weakening’ of sanctions pressure. Meanwhile, a lowering of the cap, as suggested by some Eastern European countries, would result in it remaining ‘broken,’ with neither traders nor importers paying it any mind," Kondratyev said. Meanwhile, he added, experts already see a trend toward a ratcheting up of sanctions pressure on carriers of Russian oil, which affects freight rates and costs.

"Now the G7 countries, headed by the US, are searching for ways to support the effectiveness of the price cap to expand the discount on Russia’s Urals, although amid limited supplies such efforts hardly look fruitful so far," Galaktionov stressed.

According to Potavin, the European Union may increase pressure on companies and banks from countries that have not joined the sanctions regime, although a complete rejection of Russian energy resources by the EU would create issues for the European economy overall.