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G7 Oil Price Cap About To Get More Complicated

About a month ago, the group of Seven (G7) coalition imposed a price cap on Russian oil with the objective of reducing Russia’s oil revenue which goes to fund its war machine. G7--which consists of the United States, the 27-nation European Union, Canada, Australia and Japan-- set at a maximum price of 60 USD per barrel for Russian crude oil with the provision that the cap can be adjusted in the future in order to respond to market developments. This cap is to be implemented by all members of the Price Cap Coalition via their domestic legal processes.

But things are about to get murkier as the G7 contemplates tightening the noose further on Russia’s energy revenue. Beginning on February 5, the G7 will impose price caps on Russian products, such as diesel, kerosene and fuel oil in a bid to further cut Moscow's revenue from energy exports and its ability to finance its war on Ukraine. Furthermore, the Group now plans to set two price caps on Russian refined products in February; one for Russian oil products trading at a discount to crude, and a second for Russian crude trading at a premium.

That said, capping Russian oil product prices is likely to prove a much more onerous task than capping its crude, for the simple reason that there are many more oil products and their prices depend more on where they are purchased, not produced. For instance, diesel and kerosene tend to trade at a premium to crude, while fuel oil typically sells at a discount.

Is The Oil Price Cap Working?

And now the million-dollar question: is the current oil price cap on Russian crude really working as intended? Well, it depends on who you ask. The Kremlin came out on Wednesday and claimed it had not yet seen any cases of price caps on Russian oil.

"As far as the losses are concerned, no one has especially seen the caps yet," Kremlin spokesman Dmitry Peskov told Reuters in a daily briefing.

Related: Europe Is Still Attracting A Majority Of U.S. LNG Despite Price Plunge

Hordes of analysts have contradicted the Kremlin's stance, saying that the oil price cap is definitely hurting the country.

Currently, Russian flagship Urals crude blend is trading below the price cap level of $60 per barrel.

A Finnish researcher recently told Bloomberg that the price cap on Russian oil is already costing the Kremlin €160 million ($172 million) a day, and could rise to $280 million a day when the cap is extended to refined products from Feb. 5. Last month, even Russian Finance Minister Anton Siluanov said that the country’s budget deficit in 2023 might exceed the expected 2% of GDP as the oil price cap takes a hit on export income. This marked the first time a Russian official acknowledged that the $60 per barrel price cap imposed on Russia by Europe and G7 nations will negatively impact its economy. Siluanov said that the country would tap debt markets to bridge the deficit. Russia expects to use just over 2 trillion roubles ($29 billion) from the National Wealth Fund (NWF) in 2022 as total spending exceeds 30 trillion roubles, above the initial budget.

In the same month, Russia’s Central Bank governor Elvira Nabiullina said that the country’s economy was expected to contract three percent in 2022, a sharp turnaround from its growth in 2021 citing “worsening trade conditions.” She added that Russia’s cash flows were expected to weaken considerably in 2023 as oil and gas sales to Europe plunge.

Meanwhile, Ukraine says it expects that the EU embargo on Russian oil and petroleum products should cut Russia’s profits by at least 50%.

"We expect the collapse of profits from oil and gas exports to be at more than 50%, precisely because of the introduction of the EU embargo on oil and petroleum products and the introduction of price restrictions. Oil and gas account for 60% and 40% of federal budget revenues. We expect that Russia's revenues will fall below the critical level of $40 billion per quarter," Yuliya Svyrydenko, First Deputy Prime Minister and Minister of Economy of Ukraine has said. She has expressed hope that plunging profits will make it more difficult for Russia to continue waging an expansive war.

Last month, leading shipping journal Lloyd’s List reported that seven loaded Suezmax vessels that are fully compliant with the $60 per barrel price cap and its requirements had sailed from Russian waters. According to the journal, checks  revealed that all seven vessels had secured insurance with International Group P&I clubs, which requires proof of compliance with the G7 cap of $60 per barrel before marine insurance can be provided.

By Alex Kimani for Oilprice.com

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