Oil Price Wavers after Russia Cap Kicks In

The sanctions aim to crimp Russia’s oil income while preventing a surge in energy prices

· The restrictions are the first major attempt to curb Moscow’s fossil-fuel revenue, which steadied the Russian economy after a barrage of sanctions on other industries.

· It was designed by the U.S., where officials feared severing Russia from Western shipping and insurance entirely would ricochet back on the American economy via higher oil prices.

· Moscow’s crude is likely to flow to buyers around the world, keeping a lid on the market. But Kremlin officials have said they would refuse to accept the cap, which could lead to a drop in exports,

· uncertainty around the cap has dried up sales of crude from Russia in recent weeks.

· the price of Urals crude exported from Primorsk on the Baltic, fell to about $49 a barrel, down by 29% from the start of November. S&P Global Commodity Insights pegged the price at about $53.50 a barrel. The prices doesn’t include the cost of insuring or shipping the crude, which isn’t included in the $60-a-barrel cap.

· OPEC cartel locked in current production levels to give it more time to assess the market effect of the price cap at a virtual meeting.

· Losing most of the European market forces Russia to search for buyers for about 800,000 barrels of crude each day, analysts at OilX say. From February, the embargo will apply to refined fuels, too.

· Producers would likely tap tankers that previously moved sanctioned Iranian crude, known in the industry as the shadow fleet.

· Preliminary ship-tracking data suggest it exported 7.6 million barrels of crude and refined products each day in November, according to Kpler’s lead crude analyst Viktor Katona—just below February’s level.

· Russia is putting some oil onto boats unsold and sending them toward Asia in the hope of finding a buyer en route.

· In total, Russia exported 4.5 million barrels of crude each day last month.

· Turkish refiners, which had scooped up Russian crude on the cheap this year, all but halted purchases for December.

· Cost of chartering tankers to transport Russian crude surged in recent weeks. Brokers said insurers in the West are hesitant to touch anything Russian.

The West imposed sanctions on Russian crude , pitching the energy conflict with Moscow into an unpredictable new phase that could inject further volatility into global oil markets.

The European Union and U.K. barred inbound shipments of Russian crude Monday—a watershed for a continent striving to end its dependence on Russia’s fossil fuels after Moscow invaded Ukraine and weaponized supplies of natural gas. In tandem, the EU, the U.S. and allies placed curbs on shipping, insuring and funding Russian crude anywhere in the world.

Oil prices wavered. Most-actively traded futures contracts for Brent, the benchmark for international crude sales, slipped 3.4% to $82.68 a barrel. Analysts and traders said prices initially got a boost from loosening Covid-19 restrictions in China, which are likely to lift demand in the world’s second-biggest economy, but those gains faded in morning trading in New York.

The restrictions are the first major attempt to curb Moscow’s fossil-fuel revenue, which steadied the Russian economy after a barrage of sanctions on other industries. But there is a deliberate loophole, enabling companies to facilitate Russian oil shipments to countries outside of Europe if the price is no higher than $60 a barrel.

That carveout reflects concern that Russia, the world’s biggest exporter of crude and refined fuels, could wreak havoc through energy supplies even as its military campaign in Ukraine falters. It was designed by the U.S., where officials feared severing Russia from Western shipping and insurance entirely would ricochet back on the American economy via higher oil prices.

The untested nature of the sanctions makes the impact on energy markets hard to predict. Some analysts say the relatively high level of the cap means Moscow’s crude is likely to flow to buyers around the world, keeping a lid on the market. But Kremlin officials have said they would refuse to accept the cap, which could lead to a drop in exports, even though it is above the current price of Russian crude.

On Monday, Kremlin spokesman Dmitry Peskov said Moscow was preparing its response to the policy. “One thing is obvious: We will not admit any price caps,” he said. “It’s obvious and incontestable that making these decisions [about the price cap] is a step toward destabilization of the world energy markets.”

In spite of the U.S.’s aim to keep Russian oil flowing to the global market, uncertainty around the cap has dried up sales of crude from Russia in recent weeks.

Monthslong negotiations over the level at which the cap should be set went down to the wire Friday, leaving traders, shippers, refiners and insurers with little visibility until days before the sanctions took effect. Their wariness made it challenging for Russian producers to sell cargoes.

Prices for Moscow’s crude have tumbled. Estimates vary due to the increasingly opaque nature of the Russian market, but companies that assess prices agree that they have skidded over the past month to levels below the cap. Argus Media, one such firm, says the price of Urals crude exported from Primorsk on the Baltic, fell to about $49 a barrel, down by 29% from the start of November. S&P Global Commodity Insights pegged the price at about $53.50 a barrel. The prices doesn’t include the cost of insuring or shipping the crude, which isn’t included in the $60-a-barrel cap.

“It’s really the uncertainty that created the problem,” said Livia Gallarati, senior oil analyst at Energy Aspects. “If the price cap had been announced a few months ago we may not be in this situation, and some of the Asian buyers that are currently staying away from Russian barrels may have bought more.”

OPEC+, an alliance between the Organization of the Petroleum Exporting Countries, Russia and other producers, acknowledged the unsettled backdrop Sunday. The cartel locked in current production levels to give it more time to assess the market effect of the price cap at a virtual meeting.

The sanctions pose a stiff test to Russia’s giant oil industry. Losing most of the European market forces Russia to search for buyers for about 800,000 barrels of crude each day, analysts at OilX say. From February, the embargo will apply to refined fuels, too.

Finding new markets will be doubly hard if Russian producers lose access to Western shipping, insurance and banking, as they will do if the Kremlin refuses to abide by the price cap. Producers would likely tap tankers that previously moved sanctioned Iranian crude, known in the industry as the shadow fleet. The fleet has grown this year and pivoted to Russia, but it is inefficient, comprising slow, aging tankers.

Russia is producing almost as much oil as it did before the invasion. Preliminary ship-tracking data suggest it exported 7.6 million barrels of crude and refined products each day in November, according to Kpler’s lead crude analyst Viktor Katona—just below February’s level.

But Russia is putting some oil onto boats unsold and sending them toward Asia in the hope of finding a buyer en route. Ms. Gallarati of Energy Aspects estimates that between 300,000 barrels and 400,000 barrels of Russian crude that set sail daily in November haven’t been sold. In total, Russia exported 4.5 million barrels of crude each day last month.

A big problem has been the reluctance of banks to finance trades in Russian crude to independent refiners in China, Ms. Gallarati said. She said China and India are likely to step up purchases in the coming weeks, but that for now, fear of the sanctions is curbing Russian sales.

Mr. Katona of Kpler said Turkish refiners, which had scooped up Russian crude on the cheap this year, all but halted purchases for December. “A lot of buyers: They want to buy Russian oil…but right now they want to assess what is really happening,” he said.

Shipping companies and insurers also grew cautious. The cost of chartering tankers to transport Russian crude surged in recent weeks. Brokers said insurers in the West are hesitant to touch anything Russian.

Insurers might continue to steer clear of Russian oil trades due to the administrative burden of the cap, said Marcus Baker, global head of marine and cargo at the insurance broker Marsh Inc., a unit of Marsh & McLennan Cos. He said it’s difficult to predict whether insurers in other regions will fill the gap.